Key points to note for drafting a Will

François Rabelais (1483-1553)

This quote from the famous French humanist reminds us of some important issues in Will drafting.

1. “I owe much” – the treatment of debt

A person’s estate comprises their assets less their debts. Typical debts include credit card bills, unpaid income tax for the preceding year and utility bills. However, not every debt will be accepted by HMRC as deductible.

1. HMRC are likely to ask questions if the executors claim that they had lent money to the deceased e.g. a wealthy adult child paying for the elderly parent’s boiler repairs, or paying premiums for them to maintain a valuable insurance policy. Documentation is important to justify such a debt to a family member. Is it in place?
2. Contrary to the belief of some, the cost of administering the estate e.g. the fees for obtaining professional valuations of valuables or the property are not deductible for tax. They will however be paid for by the estate before the final division of residue.
3. Certain debts will not be accepted, due to their association with tax avoidance. For example, if two years before my death I borrow £100,000 on the security of my house which I use to buy a tax-free asset such as shares qualifying for business property relief, my executors cannot claim a reduction of £100,000 in the value of my house AS WELL AS saying that I owned shares worth £100,000 which qualified for 100% business property relief.
4. Another plan HMRC have anticipated is where I give all my estate to my son and then he lends it all back to me. Seven years after my original gift, my executors are not allowed to claim that the value of my estate was nil – otherwise everyone would be doing it!

In contrast, two things which are not ‘real’ debts of the deceased, because they arise after death, can still be deducted for tax purposes: the cost of a gravestone and funeral expenses.

2. “I have nothing” – the true value of my estate

Even if my personal assets in the UK are modest at the time I die, for tax purposes my estate may still be in the wealthiest 4% of the country and subject to inheritance tax in the following situations.

1. Suppose I am a beneficiary of my late spouse’s Will trust which reverts to my step-children on my death, I may be treated as if I owned all the capital of the trust fund for tax purposes. This is the case even if I never touched the capital in my lifetime, and even if none of it will pass to my chosen beneficiaries. This is not uncommon in a second marriage situation.
2. Suppose I keep using the personalised car number plate which I gave by deed to my grandson (who shares my initials[1]) 25 years ago. The value of that number plate will still be included in my estate at death – at the value now, not 25 years ago. This is because I have not really given it away.  I have reserved a benefit.
3. I may have grossly underestimated the value of my house.
4. Moving into my adult child’s property, to whose purchase or improvement I contributed in the past may give rise to a ‘Pre-Owned Assets Tax’ charge or “POAT”. This is the case regardless of my intentions being wholly innocent as regards tax avoidance at the time I helped provide the finance.
5. I have put my house into a trust because I have been persuaded by an enthusiastic salesman at an event at a hotel that this will avoid care fees and that there are no downsides. Unbeknown to me, for tax purposes, unless I am paying the trust a full market rent for my occupation, I will be treated as if I still own the house. Furthermore, the house will continue going up in value in my estate. Was this properly explained to me when I ‘bought’ the so-called asset protection trust? Unfortunately, under the regulations, it will prima facie not work for asset protection either if the purpose was to get round a means-testing exercise.

If a person genuinely wants to die with nothing, then there are two easy ways to achieve this.  The first way, which does not necessarily involve giving up one’s security, can be to take out equity release and then live a long time. The compound interest will roll up unpaid and erode the size of your estate by increasing amounts each year.  You will never be evicted, even if there is negative equity, provided the equity release arrangement comes with a Lifetime Guarantee. Equity release may be attractive for those who do not have financial dependants.

The second say is simpler, riskier but arguably more enjoyable: to learn to SKI. This is an acronym for ‘Spending the Kids’ Inheritance.’ For once with a new hobby, it really could be as easy as it sounds, once the initial guilt has been overcome!

[1] Sadly, this is not a purely hypothetical example.

3. “The rest I leave to the poor” – charitable giving

Rabelais apparently believed he had so little that the generous sentiment was unlikely to provide any real relief to the poor.

Charitable giving on death has a number of benefits for the donor and their non charity beneficiaries.

1. It is the most affordable time to make gifts – the deceased is not aware of any loss or hardship.
2. The tax saved is 40% – even better value than Gift Aid.
3. If you give at least 10% of your estate after reliefs and nil rate bands to charity, the rest is taxed at 36%. In certain cases, this means that increasing what you give to charity slightly could lead to an increase in what your non-charity beneficiaries receive.
4. With some charities, if they know you have included them in your Will, they may have a society you can join which will invite you to some nice free lunches.

Last but not least, it is worth pointing out that Rabelais’ wishes, as written above, would not constitute a valid Will in England today. They do not comply with the required formalities under the Wills Act 1837 (as amended). Contrary to what some would like to believe, the formalities remain non-negotiable, and home-made Wills, or letters claiming to have the status of a Will, continue to be a source of legal disputes.

While humorous, there is a serious side to the points in this article, which we will be happy to explore with you if they prompt questions.