View more on these topics

Out of step

A surviving spouse considers a claim to the court for financial provision

Mr Green died in January. His will provided solely for the three adult children of his first marriage. There is also an investment bond held in trust for them. Prior to his death, Mr Green was living with his second wife, who he married five years previously. The will made no provision for the second Mrs Green, who is seeking legal advice on actions she may take. The children, in the meantime, seek advice from their IFA about the bond.

The investment bond has done well. The sum of 100,000 was invested 12 years ago and is now worth 300,000.

The basis on which the trust was written is now most important. The children find that it was written under a flexible trust for their benefit on a last-survivor basis on the lives of themselves and their father. There are 30 segments. Hence, as the bond has not yet paid out, they need to refer to the trustees, who will decide whether to continue with the trust or to distribute the proceeds.

While originally a potentially exempt transfer, there is no longer an issue of the bond being liable to inheritance tax as it was written more than seven years ago. Therefore, in theory, the trustees could distribute the money if they feel the objectives of the trust have now been fulfilled. They must first consider whether it is appropriate to advance large sums of capital or whether it would be more prudent to pass on smaller amounts over a longer period.

Since the children are all adults and, in the view of the trustees, able enough to use the funds wisely, they feel that they should advance the capital. The next stage is to consider the mechanics of doing this as both the timing of the surrender and application of the segments could produce differing results for the beneficiaries in terms of taxation.

On a straightforward surrender of the bond, tax would be payable on the gain made at the rate applicable to trusts, which is 40 per cent with a lower-rate tax credit of 20 per cent. This is because it is being surrendered in the tax year following Mr Green’s death.

Alternatively, the trustees could assign 10 segments to each of the beneficiaries and it would then be their personal tax position, rather than that of the trust, which would be taken into account.

On surrender, if the addition of the top-sliced gain keeps them within the basic-rate band, there will be no tax to pay. If they fall into the higher rate, the effective rate of tax would be 20 per cent but there are other options. First, they could delay surrender until they are basic-rate taxpayers. Or, depending on their level of income, they could surrender fewer segments to keep themselves in the basic-rate band. They could even consider a pension contribution to reduce their income to the appropriate level.

The only fly in the ointment is their stepmother. If she is successful in making a claim against the will, there may be nothing for them at all. While Mr Green undoubtedly had freedom of choice in naming his beneficiaries, English law imposes some restrictions on this. Under the Inheritance Tax (Provision for Family and Dependants) Act 1975, Mrs Green can, as a surviving spouse, make a claim to the court for financial provision. But she needs to hurry. Applications usually need to be made within six months of the first grant of probate.

In brief, the court will decide if, on an objective basis, reasonable financial provision has been made for Mrs Green and, if not, what provision should be made. The tests when assessing the position for a surviving spouse are less onerous than they would be for other claimants, for example, cohabitees or adult children. What the spouse might have received if the parties had divorced is a useful guideline often used. It is highly likely that Mrs Green will be awarded something. The court could make an order for an income to be paid from the estate or award a lump sum or transfer of property.

From the children’s viewpoint, they may have to be realistic about their stepmother’s right to something. The bond may or may not be excluded from calculations. The court can only consider the value of the net estate passing under the will. Unless it is of the view that the bond was written in trust specifically with the intention of avoiding these family provision rules, it will technically fall outside the estate and cannot become subject to a provision order. But its value may well be taken into account in deciding what is reasonable for them to keep and what should be given to Mrs Green. They may not be in for the windfall their father had planned for them.

Julie Hedge is principal of Christie Scott’s

Recommended

Skandia launches new wrap tools

Skandia has launched a new range of tax and financial planning tools for its wrap.The provider says the tools have been designed to support the advice process and enable advisers to demonstrate the benefits of their recommendations to clients.The Business Premium Equaliser calculates the premiums that should be attached to each individual member of a […]

‘Another waste of time that will be consigned to dustbin of history’

Leading IFA commentators are sceptical about whether the Government will imple-ment any of Turner’s planned sweeping changes to the pension system. Informed Choice managing director Nick Bamford says the report will be consigned to the dustbin of history, similar to the fate of the Department for Work and Pensions-sponsored 2002 report by Alan Pickering. Bamford […]

Pot luck

BGW Jamieson Principal, Jamieson Financial Management, Bognor Regis, West Sussex

Retirement Plus introduces hybrid equity release

Retirement Plus is offering a hybrid equity-release product backed by property giants British Land and Delancey. As revealed by Money Marketing in July, the product, called Property Plan, is a hybrid of a home-reversion plan, which means the client co-owns the property with the provider rather than the provider owning the property deeds outright. The […]

Mark Page: why my biggest overweight stock is a discount Spanish retailer

Artemis European Opportunities Fund manager Mark Page is questioned about the merits of investing in Spanish supermarket group, Dia. Dia is a 7,000-store Spanish discount supermarket chain. But with cheaper food prices coming on to the market and an improving Spanish economy, journalist Alexis Xydias questions Mark about its inclusion in the Artemis European Opportunities […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com