Does Your Will Have Unintended Tax Consequences?

Most wills are effective, but sometimes a will can be drafted that accurately captures the testator’s intentions, yet the legacies as drafted may have unintended tax consequences. Here are two examples of what can go wrong:

Spreading

An estate may contain qualifying business or agricultural property, where the value of the property for inheritance tax purposes can be reduced by as much as 100%. These inheritance tax exemptions are called business property relief and agricultural property relief.

Examples of relevant business property include shares in an unlisted trading company, an interest in a partnership, or a sole trade. AIM shares fall within the definition of an unlisted trading company. A farm is an example of relevant agricultural property.

There is an assumption that business property relief applies to relevant business property and agricultural property relief applies to relevant agricultural property, which makes sense. However, this only applies when the relevant business or agricultural property is a specific gift.

If the relevant business or agricultural property passes via the residue, the business or agricultural property relief attaching to the qualifying assets must be spread across the whole estate. This means the relief is apportioned between the specific gifts and the residuary gifts. Spreading may result in an increased tax liability if there are one or more specific gifts to an exempt beneficiary, such as a spouse or charity.

Ademption

The Wills Act 1837 states that a will shall be construed to speak and take effect as if it had been executed immediately before the death of the testator, unless a contrary intention appears in the will.

The courts have construed the wording used to distinguish a specific gift as showing such a contrary intention. For example, the inclusion of a description such as “my piano” means that if the piano has been replaced after the execution of the will, the gift is no longer valid because the asset is regarded as no longer being owned by the testator. This revocation of a legacy is called ademption.

Ademption can also occur through no action of the testator, such as when a company the testator owns shares in chooses to restructure its shares, leading to a significant change in the rights or value attached to them.

Where ademption applies, the expectant beneficiary receives nothing, and the asset passes to the residuary beneficiaries.

A lot can change in a person’s life between the execution of their will and their death. Therefore, it is important that the will be reviewed to ensure it continues to communicate the testator’s intentions and that they are not remembered by their family for leaving behind a contentious probate dispute.

Please contact me if you would like me to review your will and advise on the tax implications of your legacies: Register Your Interest