Sorrowful families – combating inheritance issues

The result of a recent High Court case is a caution for anyone challenging a will.

As inheritance grows to become more precious, the amount of contention surrounding wills have increased. Court cases rose by almost 50% to 188 in 2019 compared to the previous year according to the latest Ministry of Justice figures. A lot more cases are either settled or abandoned along the way. The cases which do reach the High Court tend to be those involving the ‘right’ mix of large sums and elevated emotions. An example that appeared in April 2021 is Miles v Shearer.

Tony Shearer passed away in October 2017, leaving almost all his estate worth about £2.2 million to his second wife, Pamela. His two daughters, Juliet and Lauretta, born in the early 1980s to his first wife, received nothing. This prompted them to make a claim under the Inheritance (Provision for Family and Dependants) Act 1975.

Lauretta wanted a payment from her father’s estate to cover:

• The cost of a home, so that she could move out of her mother’s property;
• Fees for training as a dog behaviourist, to enable her to support herself; and
• The expenses of caring for her autistic daughter.

Juliet sought funds to:

• Reduce her mortgage by about £245,000, so that it would become affordable for her on a repayment basis: and
• Buy out her ex-husband’s share of a flat in which she was living – about another £100,000.

In 2008, shortly after his divorce, Tony gave £177,000 to Juliet and £185,000 to Lauretta. At the time he made clear there would be no further financial support to his daughters. This was an important factor in the case as it reinforced the decisions Tony made in the creation of his will.

The judge rejected the claims of both daughters, stating that neither had established a need for maintenance to be funded from their father’s estate. Two lessons can be drawn from the case:

• Make your intentions clear in advance to try to reduce potential disappointment and the likelihood of legal action when a will is finally read.
• Tony’s will achieved what he wanted to happen. Had he left matters to English intestacy laws, Pamela would have received only £125,000 and personal chattels outright, with Juliet and Lauretta immediately jointly receiving half the residue (less about £285,000 of inheritance tax).

It is important to make sure your will is up to date and your intentions towards potential beneficiaries are clear, especially if the contents could be contested.

The eventuality of Capital Gains Tax

The Office of Tax Simplification (OTS) recently released a report on capital gains tax (CGT) making numerous recommendations on the prospective outlook of the tax, which outlines that several people have insufficient awareness and/or lack understanding. The 30-day reporting and payment deadline for residential property disposals comes in for particular criticism.

The majority of people will only be affected by CGT on a one-off basis, despite the fact that around half a million people need to report disposals each tax year, Reporting may be via self-assessment, 30-day reporting or the real time CGT service, so the OTS has suggested integration into a single customer account.

Residential property

The OTS believes 30 days to be a challenging requirement and has therefore recommended the reporting deadline is increased to 60 days. An alternative proposal suggests estate agents and conveyancers could be more involved. However, HMRC may well resist extending the deadline given that over £1.3 million was raised in late filing penalties for the last six months of 2020.

Private residence relief nominations

The OTS found a lack of awareness of the nomination procedure for second homes, and recommends:

• A review of the practical operation of nominations;
• Raising the level of awareness of how the rules operate; and
• Using a new, single customer account for nominations.

Some 1.5 to 2 million homeowners are estimated to benefit from private residence relief annually, although a common misunderstanding is to assume all private homes are exempt.

Divorce and separation

Divorced and separated couples do not incur any CGT on transfers between themselves for the tax year of separation, but very few are able to come to an agreement and transfer assets during this timeframe unless separation occurs near the start of the year.

The OTS therefore suggests relief be extended until the later of:

• At least two years after separation, and
• Any reasonable time set for the transfer of assets in accordance with a financial agreement.

Whether the government takes on board any of these suggestions may be unveiled in the anticipated autumn Budget. CGT reform could include extending the deadline for reporting CGT disposals on residential property and extending the CGT transfer exemption period following a couple’s separation.