We have all seen the stories of families being torn apart over a disputed will. Not many parents would wish that on a family already grieving. And yet a recent FT article indicated that there are still too many families where a simple lack of communication has created unnecessary conflict and wills being contested.

How to make your wishes clearly known

Proper inheritance tax planning and having a will in place together with a letter of wishes, provides clarity and avoid disputes. Whilst a letter of wishes is not legally enforceable, it is always helpful to know the deceased’s thoughts behind their will.

There is always a risk that a dependent (not necessarily a minor) could make a claim against the estate under the Inheritance (Provision for Family and Dependants) Act 1975. This Act allows a dependent to make a claim against the estate on the grounds that they were maintained by the deceased prior to death and have been left without financial provision. This highlights the importance of seeking professional advice when drafting your will and why having a letter of wishes in place would be useful.

Conflicts between children of former marriages

A common situation which we frequently come across are blended families where couples remarry and have children from former marriages. In this case. it is usually the deceased wanting their surviving spouse to benefit from their estate but ultimately, they would like their assets to pass to the children from the first marriage. If your will passes assets to the surviving spouse outright, there is no guarantee that the children from your former marriage will receive anything, and you are solely relying on the surviving spouse to ‘do the right thing’ either by making lifetime gifts or having provisions under their will.

Whilst the relationship may be all well and good at the time, this may not always be the case going forward and there is very little you can do if the surviving spouse reneges on their initial intentions.

With the use of trusts and proper estate planning, this kind of dispute could be avoided and if structured correctly, you could minimise or avoid paying inheritance tax altogether.

Interest in Possession Trusts

The creation of an interest in possession (IIP) trust set up within your will is an ideal structure for a situation such as the above. An IIP trust allows the ‘life tenant’ to enjoy the assets or the income of the trust during their lifetime or as such times dictated by the trust deed, for example, until the surviving spouse is 50 years old or re-marries. The life tenant in this situation would be the surviving spouse. They would not have any automatic rights to the assets of the trust but the trustees could make distributions to them at their discretion. When the life tenancy ends, the trust assets would pass outright to the remainderman. The remainderman in this case would be the deceased’s children from the first marriage. This could work really well for certain assets such as the family home and tax could be avoided altogether if the family home was gifted to the children at the right time.

Certain assets passing to the children during the life tenant’s lifetime could trigger capital gains tax depending on the asset and how much it has increased in value, but the CGT rates are currently much lower than the IHT rates and CGT is only payable on the increase in value, not on the full value of the asset itself.

What about family businesses?

If there is a trading family business, then this could be put into a discretionary trust with the surviving spouse and the children as the beneficiaries. A discretionary trust allows the trustees to decide who and when a beneficiary can benefit from the income and the assets from the trust, i.e. the trustee would have full discretion over the trust. The beneficiaries would usually be a class of individuals chosen by the deceased before they die. This allows both the surviving spouse and the children to benefit from any dividends received by the trust and also allow the assets to be distributed to the beneficiaries as and when they require it.

Young children in particular could benefit from this as they may be of an age where they are too young to look after their financial affairs. There is also the added bonus that some/all of the income tax paid by the trust could be reclaimed by the beneficiaries where they are not additional rate taxpayers.

If the trustees wanted to distribute the shares in the family business to the children in the future they can do so without paying tax if the asset qualifies for Business Property Relief. Furthermore, discretionary trusts have the added advantage of being able to benefit from CGT holdover relief. Holdover relief is form of relief which allows individuals and trustees to defer paying CGT when a gift is made to/from a discretionary trust subject to certain conditions being met.

If you are thinking about estate planning and would like bespoke advice on how to structure your assets in a tax efficient manner, please contact Reena Bhudia on 020 7874 8855 or rbhudia@goodmanjones.com.

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Reena Bhudia

E: rbhudia@goodmanjones.com

T +44 (0)20 7874 8855

Reena is in the private client department and provides bespoke tax advice to HNWI, solicitors and other accountants. With over 10 years of experience, she has particular expertise in inheritance tax, trusts and estates.

She has contributed to various publications including the FT adviser and the taxation magazine.

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