STATUTORY LEGACY UPLIFT

As of 26^th July 2023, the Government has announced an increase in the ‘statutory legacy’, which is the lump sum a surviving spouse or civil partner is entitled to if their spouse or civil partner has died intestate (without making a will). The previous statutory legacy was set at £270,000 in February 2020 and has now increased to £322,000. This is a generous uplift in comparison to the last increase in February 2020 which was only an additional £20,000.

Whilst this is a welcomed change, it is important for legally recognised couples to understand what it actually means to die intestate and how inheritance tax comes into play.

Intestacy rules

When an individual dies without making a Will, the rules of intestacy come into effect to determine how their death estate should be distributed. This is heavily dependent on whether the deceased was married or in a civil partnership, had children, or was survived by any other next of kin.

In simple terms, if the deceased was married or in a civil partnership, but left no surviving children or grandchildren, the whole estate passes to the surviving spouse or civil partner.

If the deceased was married or in a civil partnership, and did leave surviving children or descendants, the estate is distributed such that the surviving spouse or civil partner receives the statutory legacy mentioned above, and the remaining estate is divided such that 50% also passes to the surviving spouse or civil partner and the remaining 50% passes to the surviving children or descendants in equal shares (subject to the value of the estate being more than the statutory legacy).

In the event that the deceased did not leave a surviving spouse or civil partner, the estate would instead pass to any surviving children (or descendants) in equal shares, and failing that, it would be distributed in accordance with the hierarchy of surviving blood relatives and ultimately the Crown.

Inheritance tax

One of the main issues with leaving a death estate vulnerable to the rules of intestacy is that it may create an inheritance tax problem for the estate, which could otherwise have been avoided by a well drafted Will.

Inheritance tax can be summarised as a 40% tax levy on a death estate which exceeds the nil rate band (currently £325,000), and potentially an additional residential nil rate band (currently £175,000 provided your estate is below £2m, you are a home owner and the value of your home is ultimately passing to your children). This means that a death estate may be exposed to inheritance tax if it exceeds the value of £325,000-£500,000, which could be many of us in today’s economic climate. If you are married or in a civil partnership, the unused allowance of the deceased spouse or civil partner can also be transferred to the surviving spouse or civil partner, meaning the survivor could benefit from a combined allowance of £650,000 – £1,000,000 on their estate.

There are various estate planning mechanisms that can be put in place to mitigate the potential inheritance tax charge on a death estate, the main one being the spousal exemption. The spousal exemption is a relief which allows married couples or civil partners to pass assets to each other on their death completely free of inheritance tax. The best way to utilise this relief is by creating a Will which passes the whole estate to the surviving spouse or civil partner totally inheritance tax free on the first death, and making provision for children and other beneficiaries when both spouses or civil partners pass away. This can be done absolutely or by way of a life interest trust which allows inheritance tax to be completely avoided on the first death, and on the second death, anything passing to a non-spouse or civil partner beneficiaries which exceeds the combined allowance of £650,000 – £1,000,000 will incur an inheritance tax charge. Whilst the eventual inheritance tax charge is not always completely avoidable, this mechanism allows married couples or civil partners to drastically minimise the total inheritance tax charge on their combined estate.

Will v Intestacy

How does this differ from the inheritance tax consequences of an estate which passes in accordance with the intestacy rules?

As advised above, a surviving spouse or civil partner is entitled to the statutory legacy and 50% of the remaining estate. The other 50% passing to children will either use up some of the deceased’s £325,000-£500,000 nil rate band, and if their share exceeds this amount, it incurs the 40% inheritance tax charge. In either case, the surviving spouse will inherit less or even no allowance from their deceased spouse or civil partner, which leaves potential for their estate to be subject to more inheritance tax.

Not only do the intestacy rules leave the death estate vulnerable to inheritance tax on the first death, but there are also other adverse implications an individual may wish to avoid. Many married couples or civil partners separate from each other for years without pursuing any formal divorce or dissolution from the Courts, assuming that their lengthy time apart will be considered sufficient evidence of their separation. This often leads to such individuals assuming that their estranged spouse or civil partner will have no claim to their estate, and those who pass away without making a Will could not be more mistaken. Without a Will in place to safeguard the deceased’s estate, the law dictates that their legally recognised spouse or civil partner shall take the majority of their estate, despite being separated for several years.

It is also important to note that the intestacy rules make no provision whatsoever for non-legally recognised couples, such as cohabitees. This means that the only way to protect a non-legal partner is to ensure a Will is in place to make adequate provision for them. Otherwise, they will not be entitled to any inheritance from their deceased partner’s estate. Furthermore, if the deceased partner had an estranged spouse or civil partnership as described above, then they would instead be entitled to the estate by default. A situation I am sure many would wish to avoid.

Similarly, many individuals are sadly estranged from their children, or may have difficult relationships with them and would wish to limit their inheritance. Without making an adequate Will, the intestacy rules treat all biological children equally, regardless of their relationship with the deceased.

Whilst we have put a spotlight on the effects of intestacy and inheritance tax on married couples and civil partners, it is clear that when the distribution of a deceased’s estate is determined by the rules of intestacy, the outcome may not reflect the wishes of the deceased, married or not.

The only way to ensure your wishes are followed on your death, and to protect your estate from inheritance tax exposure, is to seek advice from an expert and make a Will. If you are concerned that your estate may be vulnerable to any of the scenarios discussed above, please do not hesitate to get in touch with us so that our specialist Private Client solicitors can put your worries at bay.