WHERE THERE'S A WILL THERE'S A WAY!
In the last month I came across some eye-opening statistics.
1. A recent study found traces of cocaine on 90% of all US dollar bills. This could explain why so many people get into the habit of returning to the US on holiday each year!
2. 2/3rds of the UK population do not have a will.
3. The UK Government is planning to borrow more money in the next three years than it has done in the last three hundred years combined.
If I was to say there was a connection between the last two statistics you may wonder what that was, but earlier this month it was announced that interest of 2.5% above base rate, i.e. 3%, will be charged on any Inheritance Tax (IHT) due that is not paid within 6 months of an individual's death. At the same time it was disclosed that the Revenue will only pay interest on tax overpaid at 1% below base rate, but no less than 0.5%. A "nice little earner" for the Government as Arthur Daley used to say, and although relatively small beer in the great scheme of things, it is indicative of what inevitably lies ahead for us as the Government try to reduce the growing budget deficit.
So what is the connection? Well, for a start, it takes longer for an estate to be wound up when there is no will, as an administrator, usually a solicitor, needs to be appointed, and they are required to distribute the estate in accordance with the law rather than the deceased's wishes. The rules are quite complex and differ between the different parts of the UK. In England and Wales, in general, if the deceased was married with children, then the surviving spouse would get the first £250,000 of the estate, with the remainder split between the children and a trust from which the spouse can only get income.
If the deceased was not married or in a civil partnership, then even if they had been living with someone for many years, the whole of the estate would go to the deceased's parents if alive, and if not, various relatives would be the beneficiaries. In Scotland it is even more complex, and if I went into the rules it might drive you to the foreign exchange to get some dollars.
Irrespective of where you live, it is almost certain the likelihood of an unnecessary IHT bill is far greater for someone who dies intestate, and one thing that can also be guaranteed is a far higher legal bill for winding up the estate. Also, the possibility that their estate will not pass to the people, or charities, they would want is also far greater for those without a will.
So why do so few people have wills?
One of the excuses I have heard more than once is that somehow signing a will is bad luck. Why people, who to all intents and purposes seem quite rational, believe the grim reaper is just waiting until the day they sign a piece of paper is beyond me. Another is that "my family will get it anyway", but as the above proves this is not necessarily the case.
I have also heard people say that they are quite complex. Well, it used to be that it made sense for a married couple to try and utilise each of their nil rate bands (currently the first £325,000) and wills would often include will trusts for this purpose. However, in one of the few pieces of legislation that has been welcome in the last few years, a surviving spouse now inherits any unused part of a deceased spouse's nil rate band, effectively meaning that if none of the nil rate band has been used, then on the subsequent death of the surviving spouse, they would have two times the nil rate band at the time of their death.
As I have mentioned before, as the Conservatives have stated that one of their eventual goals is to raise the threshold of IHT to £1m per person, to my mind it makes sense for married couples to have wills that simply pass everything over to the surviving spouse to take advantage of the possibility of eventually having £2m that can be passed over IHT free.
Even for those that have wills, meeting the six month deadline to avoid interest is difficult, especially if a lot of their estate is made up of property, or illiquid investments. For those people it may be worth keeping it simple and to consider taking out an insurance policy in trust, which would provide their executors with sufficient funds soon after their death to pay the tax due before the interest payments start accruing. This would also prevent them being forced to borrow against, or try and sell, their assets at an inappropriate time.
My advice to anyone, irrespective of their wealth is to get a will in place, keep it simple, as this will save a great deal of time and money in the long run.
Interestingly, in the US, by comparison, currently the first $3.5m of an estate is tax free, which based on the current exchange rate is over six times greater than in the UK. I suppose the first statistic gives us an indication where some of this inherited wealth goes.