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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


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