The legal view on new inheritance rules
Your Money outlined the new ISA inheritance rules last week; in brief, from 6 April married couples and civil partners will be able to pass along their ISAs to their spouses.
As described in our previous article, spouses and civil partners will be entitled to the ISA allowance even if the ISA assets are left to someone else in a will or are used to meet expenses from the estate.
However, Myers suggests that ISA assets are specifically left to spouses to maximise an ISA’s tax benefit potential. “Bear in mind,” she notes, “that if the ISA is left to your children, it will lose its tax-free status.”
Similarly, retirement income garnered from an annuity can now be passed to a surviving spouse or civil partner tax-free, if the holder passes away before the age of 75. Previously, income tax would have had to be paid.
“You should assess how this change might affect the value of your estate,” says Myers. “You may wish to reconsider how you are planning to distribute your cash and assets when you die, perhaps with more cash going to your children/grandchildren.”
Unmentioned in George Osborne’s Budget speech, but contained within the minutiae of the Budget itself, was an announcement that the use of a deed of variation for tax purposes may be scrapped.
“A deed of variation changes a Will after death to allow beneficiaries to alter the distribution of the estate,” Myers explains.
“It’s a valid way of Inheritance Tax (IHT) planning. One of its primary functions is to stop the possibility of double taxation on the same amount of money. For example, if somebody receives an inheritance (having paid IHT) and then leaves it to their children when they die, that gift would be included in the value of their estate and would therefore be taxed again. A deed of variation helps to avoid this.”
Naturally, if the deed of variation is eventually scrapped, many will end up paying more IHT.
“The change may never happen,” Myers grants, “but it is important for people who may be affected to review their Will immediately, and to have conversations with their beneficiaries in case deed of variations cease to exist. Think about whether your children’s tax position would be adversely affected by gifting them money – if the answer is yes, consider gifting directly to your grandchildren.”
If you had intended to use a deed of variation, it is strongly recommended that you pay attention to forthcoming developments in this regard – the provision is currently under review, and a final report is scheduled for release in a few months.
Myers believes these new changes further underline the necessity of Will review and adjustment at regular intervals. Over time, the value of one’s assets fluctuates, and how much your estate is worth and the amount your beneficiaries will inherit will likewise vary as a result; consumers should start considering ISAs and annuities as assets, if they do not already.
“I recommend reviewing a Will every two years,” Myers says. “Update it so it reflects your personal circumstances. This not only reduces the risk of potential disputes, but also smooths the process of administering your estate.
“A Will is one of the most important legal documents to protect your family’s long-term financial future,” Myers concludes. “Yet, almost 8 million people over 50s have not drawn one up, according to research conducted by Saga Legal Services, despite the substantial risks involved.”