My 92-year-old mother has made a will leaving her estate to my brother and me. We are both executors. We are now considering our own children's inheritance, and are aware that our children could be liable for IHT on my mother's estate and mine. Is it possible to renounce our inheritance in favour of our children without my mother, who is frail, having to visit the solicitor to modify her will?
Under current rules, there are ways to vary the terms of a will tax-efficiently even if it is impractical for your mother to change her will, say tax specialists. Paul Knox, director at Ernst & Young private client services, says setting up a “deed of variation” of the will up to two years after your mother's death would be the the best option.
“This would effectively allow yourself and your brother to enter into deeds either jointly or separately under which you can pass the whole or part of your inheritance to your respective children (or anyone else you might wish to benefit),” Knox says.
“The effect of such a deed would be to rewrite the terms of the will so that for IHT and CGT purposes the gift would be made down to your children as though the will made provision for this. This would mean that the effective gift from you to your children under the deed would not be treated as a potentially exempt transfer (PET) made by yourself.”
With deeds of variation made before August 2002 it was necessary to notify the Inland Revenue formally of an election being made to vary the will for CGT and IHT purposes. This is no longer necessary unless the result of the variation is to increase the amount of the tax becoming payable on death.
A second option, Knox says, would be for a beneficiary to make a “disclaimer” of your inheritance. However, this is seen as a less flexible procedure. Knox cautions that there is talk of the government withdrawing the tax advantages of deeds of variation.
IHT liability on shares can be cut
I have recently inherited a large number of equities. How are these treated for IHT and is CGT payable by recipients on sale? For tax purposes, is it better to sell all the shares and include the proceeds in the estate or divide the equities equally among recipients all basic rate taxpayers for them to keep or sell?
Eric Williams, private client partner at Grant Thornton, says that, while the investments will be valued at their market value at the date of death, there are important reliefs that could lower the IHT on the assets. Williams says the fact that you speak of “equities” indicates that these are probably shares in quoted companies. “If any of these holdings are a controlling shareholding in a quoted trading company, business property relief could reduce the value of that shareholding by up to 50 per cent. The relief is even more generous in respect of shareholdings in unquoted trading companies,” he explains.
Williams adds that, if any quoted investments are sold by the personal representatives of the deceased person within 12 months of the date of death, and there is a net reduction in value of these investments compared with the value at the date of death, relief can be claimed for this loss when calculating the IHT due. “The rules for calculating the amount of relief are complex, particularly where the funds are reinvested, so advice should be taken if you consider that this relief could apply,” he says. If the equities are sold, CGT will be payable by either the personal representatives of the deceased person or the beneficiaries, but only on any increase in value since the date of death because they are treated as having been acquired at that time.
He adds that the amount of the gain will be reduced by any reliefs due, such as taper relief, and also by any annual exempt amount available (currently £8,200). The personal representatives are entitled to an annual exempt amount for the tax year of death and the following two tax years.
Williams says that if you sell the equities for any other reason than tax say if you need to repay a loan obtained by the deceased the personal representative will pay CGT at a rate of 40 per cent and have only a single annual exemption available. “It might be better to pass on the investments to the beneficiaries; should they decide to sell, each will have any unused basic rate band and annual exempt amount available which should lead to a lower tax bill overall.”
Your are right to foresee snags
In a commonly marketed scheme, the husband and wife take out a policy which, on last death, pays into a trust owned by their children. Typically the quote for an annual premium is £1,000 to cover £100,000 of payout on last death. This looks a very good deal. If my wife, 56, or myself, 61, die any time before we reach 100, we are in pocket. For the insurance companies there will be compounding returns on the premiums paid, but growth has to be spectacular to create the £100,000 within a reasonable joint life expectancy. This looks too good to be true. Where is the snag?
You are right to be sceptical about a deal that looks this good, say advisers. Neil Wright, director of personal financial planning at PwC, says the policy, known as a “flexible whole-of-life policy” gives cost-effective cover in the early years, but the cost of the cover will then rise significantly. The policy a combination of an investment fund and insurance cover works by the premiums being paid into an investment fund, with units in the investment fund cancelled to pay for the life cover. Such policies have a review period, generally 10 years after the policy started, and then set periods beyond that. Wright says the policy is designed to guarantee that the premium will be enough to maintain the selected cover for the first 10 years. Thereafter the premium will be reviewed. “If the cover is initially on a maximum basis, then it is highly likely that after 10 years the premiums will have to increase significantly to maintain the initial cover,” he concludes. “The premiums will almost certainly continue to increase significantly over the life of the policy. As we are often told, there is no such thing as a free lunch.”
The advice in this column is specific to the facts surrounding the questions posed. Neither the FT nor the contributors accepts any liability for any direct or indirect loss arising from any reliance placed on the replies. Readers wishing to pursue matters raised in the column are advised to seek professional advice. Letters should be typewritten and kept as short as possible.
Get alerts on Front page when a new story is published