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Taxation Readers’ Forum: Estate planning and wills

/ 3 August 2021

Terry Jordan

Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query on whether parents’ mirror wills need refreshing.

‘I have been reviewing capital taxes for a family business. The 80-year-old parents are in partnership with their 50-year-old son. Their daughter, who is of a similar age, is not involved in the partnership.

The parents’ wills leave their respective share of the partnership to the son. They own their main residence as tenants in common, and each will leaves their respective equal share of the main residence to the children, with a life interest for the surviving spouse. Other assets are to be transferred to the surviving spouse.

The situation with the main residence seems to be a fairly common nil-rate band trust device which was popular a decade or two ago. To a large degree, the transferrable nil rate band renders this an unnecessary complication now.

However, with the reforms in recent years to trust taxation, an area with which I am not completely familiar, I wonder if the life interest now causes unintended difficulties, and whether advice to clients with this older style mirror will and nil-rate band trust should be to have their wills refreshed?’ Query 19,787 – IslandTaxLady.

Terry Jordan’s reply: Consider business property relief for inheritance tax purposes.

‘IslandTaxLady’s clients’ wills leave their respective shares in a partnership to their son, and it is implicit in the query that the interests will benefit from 100% business property relief (BPR) for inheritance tax purposes under IHTA 1984, s 104 as being interests in a business within s 105(1)(a).

The wills then leave the deceased’s share as tenant in common in the main residence to the children, with a life interest to the surviving spouse. Prior to the introduction of transferable nil-rate bands in October 2007, it was usual practice to include in the wills of spouses and civil partners a nil-rate band discretionary trust designed to capture the nil-rate band of the first to die, which was otherwise lost. If the share in the home was to be used, then debt or charge provisions were often incorporated.

However, here the survivor will apparently enjoy an immediate post-death interest within IHTA 1984, s 49A under the will of the predeceasing spouse and the effect of s 49 is to treat the widow(er) as the beneficial owner of the underlying capital. Accordingly, the spouse exemption will apply, and the gift will not use the nil-rate band. On the survivor’s death, the trust share and that owned outright will be aggregated for valuation purposes. The structure may provide some protection against care fees, as the whole home would not be owned outright by the survivor.

It is also necessary to consider the availably of the residence nil-rate bands and the taper threshold of £2m which figure is net of debt but gross of, for example, business property relief. If each estate is under £2m but combined would be over £2m, there could be a benefit in leaving a portion of the home equivalent to the band at the time to the children on the first death. The share in the survivor’s estate would then benefit from a discount for joint ownership which could offer a further saving of inheritance tax.’

The article is also available on the Taxation website.

Our private client tax team have expertise in a range of areas including wills, inheritance tax, trusts and probate. For more information, please get in touch with your usual BKL contact or use our enquiry form.

Terry Jordan

Senior Adviser, Private Client

T +44 (0)20 8922 9360
E terry.jordan@bkl.co.uk

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