09 Mar Does your Will have a Survivorship Clause…?
Having a survivorship clause in your Will isn’t always a good thing and can in some circumstances increase the amount of Inheritance Tax due.
To understand why, we need to recount the rule changes of 2007. The Inheritance Tax (IHT) rules for married couples and civil partnerships introduced a transferable nil rate band IHT allowance. This enables any unused allowance on 1st death to be transferred to the surviving spouse or civil partner. If the 1st to die leaves everything to the survivor, the survivor will be entitled to two nil rate band IHT allowances (currently 2x £325k) on their subsequent death.
This was a welcome simplification of the rules, but there could be a sting in the tail in some specific situations if your Will contains a survivorship clause. Under the old IHT rules, many Wills were drawn up on the basis that the survivor would only inherit the estate of the first to die if they survived them by a specific period – often 30 days. This was sensible planning under the old rules where it was essential to use the nil rate band on the first death, or it would be lost.
However under the new rules, a survivorship clause can result in more IHT being payable if the survivor does not own sufficient assets in their own estate to use their own IHT allowance.
Mr Smith has assets to the value of £500,000 and his wife has £100,000. They have Wills which leave their entire estate to each other on 1st death subject to a 30-day survivorship clause. Mr Smith dies followed by Mrs Smith one week later.
Because of the survivorship clause, Mrs Smith inherits nothing from Mr Smith, and IHT of £70,000 is payable on his death (£500k – £325k = £175k x 40% IHT = £70k). No IHT is payable on Mrs Smith’s death because her estate is less than her nil rate band allowance of £325k.
Without the survivorship clause, Mrs Smith would have inherited all her late husband’s estate. No IHT would have been payable on Mrs Smith’s death because of the spouse exemption, and no IHT would have been payable on Mrs Smith’s death because her enhanced estate of £600,000 would be covered by a double nil rate band allowance consisting of her own allowance, plus the transfer of Mr Smith’s unused allowance (2x £325k = £650k).
With potentially large sums at stake, anyone with a Will should review it regularly – at least every five years, or sooner if there are any significant changes in circumstances. If your Will includes a survivorship clause this may be another reason for considering a review of your IHT position.
Heir Tight Wills helps clients put in place robust provisions and valid documents – and keep then updated, to protect their loved ones and their assets both during their lifetime and after their death. For a FREE Consultation to discuss writing or updating your Will & estate planning provisions, contact Rachael Rodgers on 0845 519 7585, or CONTACT US via email.