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The Covid-19 pandemic has focussed the minds of many on the interaction of their health and wealth and ultimately ensuring their loved ones are provided for should the worst happen.

On this theme we have highlighted in our previous articles the importance of having a power of attorney so that retirement income needs can continue to be met, and also that pension death benefit nominations correctly reflect client wishes in terms of how pension wealth is inherited. In this article we focus on the importance that an up to date valid will has on passing on your client's non-pension assets.

A recent Law Society survey¹ found that almost a quarter of those who had a will in place had either written their first will, or updated an existing one, during the first wave of the pandemic. However, the same survey revealed almost 60% have no will in place.

As hopes increase for a return to some kind of normality, that sense of urgency to ensure everything is in place may drop off. Clients should be reminded of the chaos that could result after their death through not having an up to date will.

Why do I need a will?

From a financial planning perspective, it is simply to ensure that everything your client has worked hard for in their lifetime passes to those people they want to benefit, and in the most tax efficient way where possible.

In the absence of a will, a person dies 'intestate', and the law will determine who gets what. These rigid intestacy laws were written in 1925 at a time when life and personal relationships were very different to today.

For example, in modern times it is common to have blended families and children from earlier relationships. All of these things can create complexities when deciding who inherits what, and when. It is imperative your client has a will that reflects their wishes.

Why do I need to update my will?

Likewise, changes in family dynamics and changes in legislation may also mean that existing wills need to be updated to reflect current wishes.

Marriage
Getting married automatically invalidates a will in England and Wales. If a new will is not written, the intestacy rules automatically decide the distribution of the estate, which could mean that it is shared between the new spouse and children from a previous marriage, potentially leading to disputes. In Scotland, however, marriage does not invalidate a prior will, which could result in the new spouse not inheriting anything.

Divorce
On the other hand, a divorce does not invalidate a will. The current will remains valid, but for inheritance purposes, the ex-spouse is treated as if they had died when their marriage or civil partnership was dissolved.

This can have a serious effect on the estate. If the will doesn't specify what happens to any gifts made to the ex-spouse in the event of their death, the rules of intestacy could apply to that part of the will.

Changes to the family
The birth of a new child or grandchild is a trigger to review wills, as is the death of a beneficiary. Families can also fall out, which may change who benefits and how.

Changes in legislation
While tax may not always be the primary motive, if what is to be inherited can be achieved in a more tax efficient way this in turn increases what the beneficiaries will receive. Keeping a watchful eye on changing tax legislation could avoid paying unnecessary tax . But some client wills may still be based on the legislation which existed at that time the will was drafted and miss an opportunity to increase what can be inherited tax free. Examples of this include:

• Transferable nil rate band. Prior to October 2007, if an individual died and left everything to their spouse, their nil rate band would be wasted. To ensure this didn't happen, wills were often constructed so that on first death, an amount up to the nil rate band was gifted directly to say children, or to a trust of which the surviving spouse could be a potential beneficiary. At the time, the nil rate band was £300,000, and so this would have potentially saved them up to £120,000 in IHT. There is now less need for these more complicated arrangements as the nil rate band became transferable from October 2007.
• Residence nil rate band (RNRB). Introduced in the 2017/18 tax year, this now stands at £175,000 per individual, but could be less for large estates in excess of £2m. This too is transferable. But to be able to use the RNRB, the property must be left to children. This may conflict with wills made pre 2007 which provided for gifts up to the nil rate band on first death, as above.
  
  As the family home is often a significant part of a couple's total estate, it was common to achieve this by changing ownership to tenants in common and leaving half of the property on discretionary trusts on first death. Unless the will is changed, this could mean that a RNRB is lost. Even though children are potential beneficiaries of a discretionary trust, the deceased would not qualify to use the RNRB. Although the survivor could still claim the unused RNRB, the IHT saved may be capped at the value of their share of the property on death. This could result in extra IHT of up to £70,000.

Dealing with investments on death

Not all investments will be dealt with by the client's will. Pension death benefits are typically outside the estate and a nomination form may be needed to direct where and how these are to be paid. Also jointly held assets, including bonds and unit trusts/OEICs, will pass automatically to the surviving joint owner and not under the terms of the will.

It is possible for a client to make a specific gift of an investment in their will. However, frequently their savings and investments will form part of the residue of their estate i.e. what's left after tax and any specific legacies have been dealt with. It is then down to the deceased's personal representatives to determine whether to dispose of the investments and distribute the proceeds, or to pass those investments directly to the estate beneficiaries and for the beneficiary to decide when they wish to encash them.

• Investment bonds
  If the deceased was the only or the last surviving life assured, a chargeable event will occur on their death and the bond will come to an end. The personal representatives will then have the proceeds of the death claim to pay to the beneficiaries.
  
  Capital redemption bonds and investment bonds with additional lives assured do not come to an end when the policyholder dies and will remain in force. The personal representative will have a choice on how they distribute the value of the bond to the beneficiaries of the estate. They can either:
  
  
  1. surrender the bond and pay the proceeds to the beneficiary, or
  2. assign the bond to the beneficiary
  The personal representatives would pay basic rate tax on any gain with credit given to the beneficiary. However, this is treated as estate income rather than a bond gain and top slicing relief won't be available.
  
  Assigning the bond allows the beneficiary to control the timing of a chargeable gain and it also opens up the possibility of top slicing relief.
• Unit trust and OEICs
  The personal representatives will have a similar decision on whether to encash and distribute the proceeds or to change the ownership into the names of the beneficiaries.
  
  Selling the holding would be a disposal and any gains in excess of the annual exemption which have arisen since the date of death may be taxable at 20%. If the assets are transferred to the beneficiaries there is no disposal and the beneficiary will be deemed to have inherited the asset at the value at the date of death. But if there are multiple beneficiaries then each would have their own annual exemption rather than a single exempt amount if encashed within the estate.
• ISAs
  The tax advantages of an ISA can temporarily continue after the investor's death. Growth and income may remain tax free whilst the administration of the estate is being completed.
  
  If the deceased ISA holder had a surviving spouse or civil partner, they may be entitled to an increased ISA allowance known as an additional permitted subscription (APS). This allows them to make an increased contribution to their own ISA based on the value of the deceased's plan.
  
  It's not the deceased's ISA assets which are inherited but an additional ISA allowance equal to the value of the deceased's ISA. This APS is in addition to the £20,000 annual ISA allowance available to the survivor.

Summary

Discussing wills with clients may be a difficult subject, but one where advisers can add huge value. For many people, it is something they might put off to another day, although the current Covid-19 crisis has certainly has focussed minds, as witnessed by greater demand for wills during the first wave.

¹ https://www.lawsociety.org.uk/contact-or-visit-us/press-office/press-releases/law-society-research-respondents-made-or-updated-their-will-during-the-first-covid-19-lockdown