'Double whammy' as families face 'large legal costs' & 'unexpected' Inheritance Tax bills

Inheritance Tax (IHT) can be managed through Wills, which ensure assets are passed on to intended beneficiaries and no more tax is paid than necessary. Will creation is usually encouraged by estate planners as it can mitigate issues which would otherwise be very challenging to handle during the bereavement process. Usually, IHT is levied on the estate of someone who has died and is passing on their assets, so long as their estate is valued over £325,000.

Where IHT is charged, it is paid at 40 percent on the parts of the estate valued over the £325,000 threshold. Having a Will in place can ensure there is no confusion in how an estate is managed following someone’s death and without one, in some rare cases, an estate can end up in the hands of the Crown.

As coronavirus emerged, it forced many people to evaluate their estate affairs, especially as older people were more at risk of the virus. Unfortunately, while the pandemic prompted effective planning, it also led to difficulty in managing certain stringent rules.

Debra Burton, a Partner at Lime Solicitors, explained: “So called ‘Covid Wills’ have led to an increase in Will challenges. We are seeing more will validity challenges based on the will not being properly witnessed.

“The rules on how to make a Will are complicated for lay people to understand, particularly around witnessing. Lockdown made the problem worse as it could prove very difficult to find one witness, never mind two. There is also still a lot of myths around Wills, particularly online e.g. Wills can be signed electronically (they can’t – it still needs a wet signature) or only one witness is now needed.

“Disgruntled beneficiaries are now focussing more on how the Will was witnessed and testing the evidence of the witnesses where previously they may not have bothered if it looked fine on its face. Challenging a will based on lack of proper witnessing can be an easier claim to bring (therefore cheaper) than a claim based on lack of testamentary capacity, for example. There is no need for expert evidence or judicial discretion if the witness evidence is clear. Either the Will was witnessed properly – so it’s valid or it wasn’t – so it fails. It’s very black and white.”

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Ms Burton went on to break down how this is creating difficulties within families and how going to the courts may prove futile.

“Allegations of undue influence are also on the rise,” she said.

“Traditionally the courts have been very reluctant to overturn a Will based on undue influence unless there is very clear and convincing evidence to support the allegation – which is almost never available. However, lockdown gave an unprecedented opportunity for vulnerable people to be forced into making a Will that they didn’t really want.

“Testators were literally locked away with certain family members and kept apart from others. Lawyers await the first undue influence Covid cases to make their way through the court system to see if the court is prepared to now accept that such controlling and coercive behaviour does go on.

“Will challenges can also lead to problems with Inheritance Tax. If a Will is successfully challenged due to a witnessing mistake, then it may unravel the testator’s careful estate planning which was designed to save Inheritance Tax. Alternatively, a Will executed in suspicious circumstances or even one just made in haste as a result of the pandemic could end up overruling an earlier tax efficient Will or having unintended tax consequences. This could result in a double whammy to the estate – large legal costs and an unexpected Inheritance Tax bill.”

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To illustrate how difficult these circumstances could be for families, Lime Solicitors shared a case it recently worked on which concerned care home issues. The company said: “The deceased made a will in April 2021 shortly before his death in June 2021.

“He was living in a care home at the time. The deceased was not married nor had any children and had been estranged from his extended family for a number of years.

“The deceased had said over a number of years to his friends that he didn’t want his extended family to inherit anything. However, the deceased hadn’t made an earlier Will so the family would inherit under the intestacy rules.

“The Will was a pre-printed Will pack (the type that can be bought from a local stationary shop) and was brought to the care home by two of the deceased’s friends.

“The friends had waited until the Covid restrictions had been lifted in the care home so they could both act as witnesses to the Will. Unfortunately, the order of the witnessing was incorrect which meant that the Will was invalid.”

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The need for effective IHT and estate planning was laid bare recently by new research from Fidelity International. The investment and retirement planning company surveyed a nationally representative sample of 2,000 UK adults.

The results found two-fifths (41 percent) of people are working longer, spending less, or are even downsizing so they can afford to give their loved ones an inheritance. Fidelity’s findings showed many people are “gifting away” their golden years by putting a variety of financial restrictions in place so that they can afford an inheritance. This follows its research revealing that more than two-fifths (43 percent) of the UK population expect to receive an inheritance one day – rising to almost two-thirds (65 percent) of younger adults.

Worryingly, nearly half (47 percent) of those hoping to pass on wealth said they have not made any financial plans about how to achieve this, with only one in five (20 percent) researching how much they will need for retirement income or later life care. Instead, many are making sacrifices which could have a negative impact on their quality of life.

Dawn Mealing, the Head of Advice Policy and Development at Fidelity International, commented: “The expectation from nearly half of the population to one day receive an inheritance is overshadowing what most people see as their ‘golden years’, putting an undue amount of pressure on retirees when they should be enjoying the fruits of their labour. Our research has shown that two-fifths of people are making sacrifices to their own lives and retirements in order to afford an inheritance, but almost half have not considered how financial planning could help them cover these costs without having to make these sacrifices.”

Ms Mealing concluded: “Out of the 58 percent of the UK population planning on giving an inheritance one day, almost two-thirds (61 percent) have not created a Will, while only one in ten (10 percent) have discussed their plans with a financial adviser. When asked why, 68 percent said they had just not gotten around to it, while 16 percent said they did not know where to start.

“While delaying estate planning is understandable, most people don’t realise that it could actually have a detrimental effect on their financial wellbeing now and in the future.

“Firstly, it means that you may be putting unnecessary financial restrictions in place that are having a negative effect on your ability to spend now, and secondly if you pass away before making any plans, your inheritance may not be handled the way you intended.

“By speaking to a financial adviser, not only can you make sure your inheritance if gifted the way you want, but you can also discuss how you can enjoy your later years without having to scrimp and scrape for an inheritance. Retirement is an important period in your life, and by speaking to an adviser you can plan for the retirement you deserve while feeling assured your loved ones will be looked after in the future.”

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