When your wife screws up your inheritance tax planning
In compadre Len Dastard’s final piece on Wills last week, he mentioned the existence of the transferable nil rate band for inheritance tax purposes. Lenardo mentioned that, if your combined Estate as a couple exceeds £650,000 (on current figures) that mean old Mr. Taxman could take 40% of the balance. What he did not point out (no professional rivalry here. Move along) is that, if your old lady (statistically speaking chaps, you *will* be kicking the bucket first) does not spend the rest of her days mourning your passing and (heaven forbid) gets herself some new booty, your kids may not get all your money.
Let me explain...
Mr & Mrs Bitter jointly own a big house worth approximately £650,000. Mr Bitter's will directs that his half share is to pass to the couple's four children in equal shares. At the time of his death, Mrs Bitter's will includes similar provisions, meaning that, on the death of both parents, the children could anticipate 25% each. As the house is owned jointly, under the joint tenancy, Mr Bitter's share will automatically pass to Mrs Bitter rather than the children, so that she owns the whole property. Assuming a status quo, the children will, eventually obtain their 25% on the death of Mrs Bitter. The value of the property will be wholly covered by two nil rate bands(assumed £325,000), so they will inherit free of tax.
But, consider if Mrs Bitter, after a shockingly unsuitable period of mourning, is swept off her feet by a dashing bounder. Bitch. He is young, wealthy, attractive and fertile, and has numerous children from a previous marriage. Bastard. Mrs Bitter remarries to become Mrs Wallet, sells the original family home to buy a country mansion with her new husband. Her children are concerned, but she shows them her redrafted will which specifies that her share of the property is to go to her four children.
However, Mrs Wallet suddenly and suspiciously falls ill, and on her death, Mr Wallet becomes entitled to the whole of the new property under the joint tenancy. On his death, the whole property is split between the beneficiaries of his will, namely his 17 illegitimate children. Mr Bitter's children will receive nothing.
It gets worse...
Alternatively, Mrs Bitter marries Mr Trolley, who is some years her senior and who owns company shares which do not qualify for any exemption, but which produce a good income. He dies a couple of years after their marriage and leaves the new Mrs Trolley the shares worth £650,000 absolutely.
Mrs Trolley is of good moral standing, and amends her Will to ensure that the shares will pass to members of Mr Trolley's family and the original property that she brought to the marriage will still pass to her own children. Job’s a goodun?
However, on her death, despite having seen off two husbands in full possession of a nil rate band, the maximum enhanced Nil Rate Band she is entitled to is 200% of the current rate, assumed to be £325,000 x 2 = £650,000. She will inherit assets from both husbands free of tax, due to inter-spouse exemption, but on her death, she owns assets worth £1.3m, but only has £650,000 nil rate band available. Her children will therefore suffer tax at 40% on half of the value of their share, an effective 20% reduction in the value they receive.
So the moral of this story? Either do your inheritance tax planning on the first death, or take her with you...