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How to avoid leaving behind unecessary tax bills

Rik Mayall Died Without a Will and May Have Accidentally Cost his Widow £60k

Could you be in the same position?

When Rik Mayall unexpectedly boarded the Last Freedom Moped out of Nowhere City last year, I’m not ashamed to admit I shed a little tear. Helpless laughter in front of an episode of The Young Ones was a highlight of my teenage Thursday nights in the early eighties. (What can I say, there wasn’t much going on in Anglesey in 1984!)

But I was surprised that even a “Rebel without a Clue” like Rik hadn’t, by his mid-fifties, got round to making a will. And when I worked out the tax consequences of his having died “Intestate”, my jaw dropped.

What he left

Rik left an estate that was worth around £1.2million. As he hadn’t left a will, the whole of his estate didn't automatically pass to his widow. Instead it was divided between his widow and children as follows, according to the Rules of Intestacy:-

  • His widow inherited the first £250,000.00, with no Inheritance Tax (IHT) to pay, because IHT isn’t payable on legacies between spouses.
  • She also inherited a “Life Interest” in £475,000.00, one half of the rest of his estate, again with no IHT to pay. Had Rik passed away after October 2014, she would have inherited that sum absolutely, not just for life, as a result of an October 2014 change in the Intestacy Rules.
  • His children inherited the remaining £475,000.00 between them – but this is where it all went wrong.

Taxation Troubles

Although legacies between spouses are tax-free, IHT is payable on legacies to children. The first £325,000.00 passes to children tax free (this is the Nil Rate Band), but the tax is 40% of anything over and above that amount.

So, the net effect of £475000.00 of Rik’s estate passing to his children is that IHT became payable on the excess of £150,000.00 - a bum-clenching £60,000.00 tax bill! That £60,000.00 could instead have been used to contribute towards his widow’s financial security if only Rik had written the right kind of will.

Is there a way out of this for Rik’s widow?

Yes there is, potentially. Provided all three of the children agree, and provided this is done before the second anniversary of Rik’s passing, a Deed of Variation can be drawn up, passing the whole of the Rik’s estate to his widow. That would give her the security of the full £1.2 million to live on, delaying any inheritance tax liability until the end of her life.

At the end of her life, her own £325,000.00 Nil Rate Band would be added to Rik’s unused Nil Rate Band, so that the children could inherit the first £650,000.00 before paying IHT.

As for the excess over and above that £650,00.00, yes, IHT would be payable at 40%. If the estate were still worth £1.2million on her death, the IHT bill would be £220,000.00, which is quite a hefty chunk of change.

Planning for the future

Reducing or eliminating that bill would involve several options either alone or in combination:-

Making a P.E.T – a Potentially Exempt Transfer – during her lifetime, she could give the children very substantial gifts, and provided she lived on for a further 7 years after giving the gifts,  IHT would not be payable.

Or

(and I bet this would be Rik’s favoured option) – G.I.S – she could just Get It Spent!

Or

She could take out a life insurance policy, written in trust in favour of the executors of her will - surely to heavens she'll have written one! - that pays out £220,000.00 to her executor, which they would then use to pay the tax bill. She'd have to take some advice and do her sums, as to whether the premiums were cost effective. The younger and fitter you are when you take out a policy like this, the lower the premiums.

Any questions?

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