FINANCIAL AND ESTATE PLANNING * IHT Exemptions:
Testator = person who makes a will. OPTION 1 – Use during lifetime:
If the deceased made a valid will: they have died testate. Terms of will Potentially exempt transfers (PET):
determine who inherits the succession estate. These are gifts made to another. – eg. parent gives their child
If the deceased died without a valid will: they have died intestate. £10,000.
When the transfer is made: No IHT is payable yet.
ESTATE PLANNING WITH CLIENT: If transferor survives 7 years from the date of PET: No IHT at all.
If transferor dies within 7 years of making PET, the PET becomes
First interview: chargeable: IHT payable at death rate, 40% above the nil rate
* Collect client’s personal and financial details: band.
Name, address, date of birth, marital status, occupation
Current income, spending, assets and liabilities Lifetime chargeable transfers (LCT):
Pensions (if any) These are transfers made into a trust on or after 22 Mar 2008.
Insurance policies (if any)
Gifts made/received When the transfer is made: Transferor must pay IHT at the
If any significant financial changes are expected lifetime rate, 20% above the available nil rate band.
If transferor survives 7 years from the date of LCT: No IHT.
* Ask the client about their objectives: If transferor dies within 7 years of making LCT: IHT is re-assessed
Likely: estate planning to transmit their wealth. at the death rate, 40%.
Best practice is to have a will which will avoid intestacy,
executors/guardians/trustees will be appointed. This If client owns public company shares, also invest in a private
allows client to control what happens to their estate on company to make use of the Business Property Relief.
death, express burial wishes, ensure smart tax planning.
Look through the exemptions in the section: “Inheritance tax”.
* Comply with Professional Conduct Rules: SRA Code of Conduct
OPTION 2 – Use when drafting a will (on death):
Send client a client care letter including:
1. Scope of work: explaining the scope of the work, When a person dies there is a deemed transfer of all their assets.
confirmation of what is included in and excluded from Deemed transfer gives rise to IHT, at death rate of 40% above
scope and next steps. the nil rate band.
2. Clear/concise cost breakdown and explanation of
potential additional costs. Ensure that the client receives No CGT is payable on death.
best possible information as to pricing and the costs of
the matter and is updated regularly. – CCS 8.7 Calculate the taxable estate:
3. Likely timescales for the agreed work 1. Death estate:
4. Action required from client Includes: property passing under will/intestacy,
5. Details of a named contact and how to get in touch joint tenancy, gifts with reservation of benefit
6. Inform client of the right to complain to the solicitor (= person gifts an asset but reserves a benefit in
about their service and charges, how a complaint can be that asset.)
made – CCS 8.3 Doesn’t include: remainder interest if
remainderman dies before life tenant,
CCS 6.2 Identify and avoid conflicts of interests. insurance policies if proceeds are not payable
CCS 3.1 and 3.4 Act in your client’s benefit. to the estate and discretionary pension
SRA Principles 4, 5 and 7 Act with honesty, integrity and in your schemes if pension moneys are not payable to
client’s best interests. the estate
* Carry out Customer Due Diligence Checks. – MLR 2017 CCS 8.1 2. Use market value of each asset:
* Avoid committing an offence by helping client conceal/hide Related property: assets that are worth more as
money obtained unlawfully. – Proceeds of Crime Act 2002 a set than individually. Each party’s share will be
Tax planning: *More details on this in the Inheritance tax section* valued at half the value of the combined pair. –
* Who should the assets be transferred to? eg. in case of a set of vases, the set is more
expensive than each separately.
Gifts to spouse: Joint property: Where land/buildings are co-
Is your client married/planning to get married? owned by persons who are not spouses, value
of deceased’s share is reduced by 10% as it is
s.18 Inheritance Tax Act 1984 Equalisation of the estates: more difficult to sell a share of a property than
Married couples must aim to divide wealth between themselves the whole.
for better tax planning and financial security for the less wealthy
spouse. Any transfer between spouses is 100% exempt for IHT 3. Deduct all debts. – eg. outstanding balance on credit
and CGT. card or loan
4. Deduct post-death expenses if any. – eg. funeral
Reduce the couples total tax bill: expenses and cost of a tombstone, cannot deduct for
1. Use the annual exemption of both spouses. anything else.
2. Transfer assets that produce income to the spouse in a
lower income tax band. – eg. dividend yielding shares or DISTRIBUTION ESTATE:
property making rent profit.
Administration of Estates Act 1925 Intestacy rules apply to inheritance.
Ownership is split equally between the two of them and each
party’s share will be 50% of the total value. If a valid will doesn’t dispose of all possessions: partially intestate:
- follow the will for distributed property and
Gifts to anyone else: - follow the intestacy rules for undisposed property.
Gifts made to make use of the available exemptions/reliefs and
to reduce the value of the donor’s estate. Focus on gifts that Example:
attract Business Property Relief or Agricultural Property Relief. – Cassie’s will: I GIVE: the house I own to my sister Siobhan, the balance of
eg. Business Property Relief is particularly useful if the client my NatWest account to my nephew Sheamus, my piano to Mary.
owns shares in a public company. Siobhan, Sheamus and Mary inherit as per the will. Cassie’s household
possessions are not disposed of, these will pass as per intestacy rules.
* How should the assets be transferred?
Succession estate = all of a person’s assets which pass on to successors
Outright gifts Trusts Transfer into joint names after death. Deceased’s personal representatives (PRs) administer the
Simplest way Flexible and may be Rules of survivorship estate. After paying debt and expenses, remaining assets are distributed.
to transfer an used for complex tax apply so survivor will
asset. planning strategies. get automatic access. To identify all assets, identify property that is excluded.
Least costly Can be costly due to If the asset is the main If not excluded = part of the succession estate.
option the ongoing residence, then RNRB
administration and will not apply.
legal fees.
Private Client – Revision Notes | Page 1 of 19
,Excluded assets: Issue = children and remoter linear descendents e.g. grandchildren and
includes adopted children.
None of the below excluded assets form part of the succession estate.
Reference to marriage/spouse includes any person who has entered
Statutory nominations: into a heterosexual or same sex marriage or civil partnership.
Statutory nominations = nominations of up to £5,000 to transfer money
held in friendly society bank accounts. Beneficiary receives the money. If a clause in a will makes a gift conditional on getting/being married:
If the will was executed before 13 March 2014, marriage will refer to
Donatio mortis causa (DMC): marriage of opposite sex couples only.
DMC = gift made during donor’s lifetime in contemplation of and For a will executed on or after 13 March 2014, marriage will include
conditional upon death. Donor recovers the asset if he changes his mind. marriage of same sex couples.
Assets held in trust/settlement: Statutory trusts:
Original trust deed controls the destination of the property.
s. 47 AEA Beneficiaries other than spouses or parents/grandparents
Life interest trusts: types of beneficiaries: take their inheritance on the statutory trusts.
- Life tenant with a life interest. – eg. income during lifetime
- Remainderman with a remainder/reversionary interest – eg. The terms of the statutory trusts are:
receive capital when life tenant dies. (a) Beneficiaries must survive the intestate and reach 18 or marry
earlier to inherit. Until then, their interest is contingent but will
Pensions and policies written in trust: receive both maintenance and accumulation of capital.
If a policy is written in trust the policy proceeds don’t form part of the If a beneficiary satisfies the requirement, they inherit absolutely
succession estate but the money is paid to the beneficiaries directly. and their interest is vested.
(b) s.3 Estates of Deceased Persons Act 2011 If they die before
Life insurance policies: their interest vests, their share does not pass to their issues.
Provider pays a lump sum to the deceased’s estate on death. These Add substitution limb so that beneficiary’s issue can inherit if
policies are typically written in trust. beneficiary’s issue reach the age of 18 or marry earlier.
Discretionary Pension Schemes / Lump sum pension benefits: Surviving spouse’s right to the family home:
If deceased nominated third party to receive the money or the policy
written in trust, the beneficiary is paid and does not form part of the Intestate’s surviving spouse has right to possession of the family home.
succession estate.
But note: if lump sum is payable to PRs, then money forms part of Sched 2 Intestate Estates Act 1952 This right must be exercised within
the succession estate. 12 months of the grant of representation.
Property held as beneficial joint tenants: If an intestate has a surviving spouse:
Survivorship = if deceased and other(s) held property as beneficial joint Where the family home was owned solely by deceased or held
tenants, property passes to remaining joint tenant(s). But note: if jointly as tenants in common, a surviving spouse can require
property was held on beneficial tenancy in common, deceased’s share the PRs to appropriate the family home for them to ensure
will go to his succession estate. they remain in occupation. If spouse’s entitlement is worth less
than property’s value, spouse must pay PRs the difference.
Joint bank accounts: Unless otherwise stated, deemed to be owned as This is not possible if deceased owned the family home as
joint tenants (survivorship) and is outside the succession estate. beneficial joint tenants with another, as property will pass via
survivorship.
Exercise - Succession estate:
Intestacy exercise:
Emily Reid dies intestate. Emily held the below:
1. House: owned by Emily and Charles as beneficial joint tenants. Adam dies intestate. Adam was married to Brenda and had three
2. Assets owned by Emily and Charles, beneficial joint tenants. children, Cedric, Denis and Edna. Edna is 17 and married, while Cedric
3. Gallery owned by Emily and Ed, tenants in common, 50% share. has died last year but he had two young children. Value of estate:
4. Discretionary Pension scheme nominated in favour of Charles. £270,000 + personal chattels. Who will inherit his estate?
5. Life assurance payable to Emily’s estate.
Provided Brenda survived Adam by 28 days, she would be entitled to:
Emily’s succession estate? • personal chattels
Items 1 and 2 - held on joint tenancy and pass directly to Charles as the • a statutory legacy of £270,000
surviving joint tenant under the law of survivorship. Excluded from the • one half of the residue
succession estate.
Item 4 - discretionary pension lump sum, is payable directly to husband Adam’s 3 children, would be entitled to the other 1/2 of the residue on
Charles as it was nominated for him and does not form part of the statutory trusts in equal shares i.e. 1/3 each of the half available. Their
succession estate. interests will be vested as they are all over 18 or married.
Items 3 and 5 - included in the succession estate. Gallery is included as
Emily had a 50% share. Cedric has pre-deceased Adam so he cannot inherit. Under the
substitution limb of the statutory trusts, Cedric’s own children, Fiona
INTESTACY: and Gerald, are entitled to his 1/3 share provided they reach the age of
18 or marry earlier. Fiona and Gerald will each have a contingent
Intestacy rules: interest in half of Cedric’s share.
s.46(2A) Administration of Estates Act 1925 Did the deceased have a Note that if Adam’s estate, excluding chattels, had been worth less than
spouse who survived them by 28 days? the statutory legacy of £270,000, the whole estate would pass to
Brenda.
IF YES: Did deceased have an issue? IF NO: Did deceased have issue?
YES: YES: Issue receives everything on
PROPERTY DISTRIBUTION EXERCISE:
Spouse receives: statutory trusts Dennis Johns died last week. Emma, his daughter wants to know who is
Personal chattels = all tangible
movable property except: NO: entitled to inherit her father’s estate. Dennis was married to Claire but
s.55(2)(x) AEA s.46 AEA Whole estate passes as per they divorced last year. Dennis had 3 children, Emma, Stephen and
cash, statutory order, to: Daisy.
assets used for business I. Parents
purposes and Siblings of whole blood Dennis held the following assets in his sole name:
assets held as investment II. Siblings of half blood 1. Cooperative Bank current account (balance £9,000)
III. Grandparents 2. Saxophone (value £4,000)
Statutory legacy of £270,000 IV. Uncles/Aunts of whole 3. Other personal chattels (value £2,500)
1⁄2 of residue blood
V. Uncles/Aunts of half blood 4. Legal & General life assurance policy written in trust for his
Residue = remaining succession children equally (value £60,000).
estate after deducting chattels (half-blood siblings of a
and statutory legacy. parent) or
VI. Crown (bona vacantia) Dennis made his own valid will. Explain how his estate will be
Issue receives: distributed.
Other 1⁄2 of the residue on statutory Where a category of relative is
trusts entitled e.g. siblings, estate is
divided equally between them.
NO:
Spouse receives everything.
Private Client – Revision Notes | Page 2 of 19
, Clause 3
I Give the following specific legacies free of tax and costs of transfer
a) My saxophone to my daughter Emma Johns
b) All my personal chattels as defined by section 55(1)(x) of the
Administration of Estates Act 1925 not otherwise specifically
bequeathed by this will or any codicil hereto to my wife Claire
Johns.
Clause 4
I devise and bequeath all the rest and residue of my estate both real
and personal whatsoever and wheresoever (not hereby or by any codicil
hereto otherwise specifically disposed of) subject to the payment of my
debts, funeral and testamentary expenses and legacies unto my wife
Claire absolutely provided that if this gift should fail for any reason then
by substitution to my son Stephen and daughter Daisy Johns equally
and absolutely.
Signed by Dennis and witnessed by Jared Smith and Emma Johns.
Succession estate:
The life policy does not form part of the succession estate as it is written
in trust for the children. Emma, Stephen and Daisy inherit £20,000 each.
All other assets form his succession estate and will pass under his will.
Inheritance - Will:
Clause 3 a): Emma was a witness to the will so the gift of the saxophone
fails and forms part of the gift of chattels in clause 3 b).
Clause 3 b): This gift fails as Dennis and Claire divorced after execution.
Distribution:
All chattels including saxophone will be distributed as per clause 4.
Clause 4: Claire is named as the beneficiary but she cannot inherit.
However, there are words of substitution that allow Stephen and Daisy
to inherit half each instead of Claire.
Private Client – Revision Notes | Page 3 of 19
