It was recently reported that one-third of over-55s have not made a Will, meaning they would die intestate. This can result in assets not passing to the chosen beneficiaries and could also generate an unnecessary inheritance tax liability.
Who inherits when a person dies intestate?
When a person dies intestate, there are a set of rules that apply in the absence of a Will. The intestacy rules dictate who the estate passes to and in what share. It may surprise you that if your spouse or civil partner dies, you may not automatically receive all of his or her estate.
For example, Mr Jones dies in September 2019 without leaving a Will, leaving his wife and three children. Under the intestacy rules, his wife will receive the first £250,000 of Mr Jones’ estate, all his personal possessions and half of his residuary estate. The other half of the residuary estate would pass to their three children in equal shares and be held in trust until they reach the age of eighteen. However, if Mr Jones’ estate was comprised of £250,000 worth of assets or less, the children would not inherit anything from his estate.
If Mr Jones had no children, grandchildren or great grandchildren, his wife would receive his entire estate.
When children inherit via the intestacy rules, it is important to note that step-children are not included as beneficiaries, unless they have been legally adopted by the deceased step-parent. Therefore, if one of Mr Jones’ children is a step-child, the applicable share of his estate would pass to the other two children in equal shares and the step-child would receive nothing.
If a person dies intestate and has neither a spouse/civil partner, nor any children or grandchildren, then the intestacy rules state that the deceased’s entire estate shall pass in the following order:
- Brothers and sisters
- Half-brothers and half-sisters
- Uncles and Aunts
- Half-uncles and half-aunts
- The Crown
The intestacy rules do not apply to assets that are held jointly, such as property held as joint tenants and joint bank accounts. These assets would pass automatically to the other joint owner(s) named on the account or title deed.
The inheritance tax consequences
When assets are left in a Will or pass under the rules of intestacy to a surviving spouse or registered civil partner, they pass free from inheritance tax. However, when a person dies intestate, the assets may not all pass to the surviving spouse or civil partner and may trigger an inheritance tax liability.
Continuing with the example of Mr Jones, who has died intestate leaving his wife and three children. At his death, Mr Jones had an estate worth £1.6 million in his sole name. In accordance with the intestacy rules, his wife would receive the first £250,000 and half the residuary estate. The three children would inherit the other half of the residuary estate being £675,000 in equal shares.
In this example, Mr Jones owned his house as joint tenants with his wife, which means his estate would not be able to claim his additional Residence Nil Rate Band allowance at this point, as no share in the property had passed to his children.
The share of Mr Jones’ estate that passes to his wife will not incur any inheritance tax. However, the share of Mr Jones’ estate that passes to his three children will result in an inheritance tax liability. Mr Jones’ Nil Rate Band allowance of £325,000 (the amount of your estate which is free from inheritance tax) would be applied, but the remaining value inherited by the children (£350,000) would be taxed at the death rate of 40%. The inheritance tax liability would be £140,000.
In contrast, if Mr Jones had made a Will and left his entire estate to his wife, it would have passed to her free of inheritance tax. It would also mean that Mr Jones’ Nil Rate Band and Residence Nil Rate Band allowances would remain unused and could thereafter be transferred to his wife to be used on her death, meaning she would have a combined Nil Rate Band allowance of £650,000 plus the combined Residence Nil Rate Band allowance.
Marriage and divorce may result in intestacy
Dying intestate, or part-intestate, can also occur as a result of marriage/civil partnership or divorce.
If you make a Will prior to getting married, it will automatically be revoked once the marriage has taken place. If you die without making a new Will, your estate would pass in accordance with the intestacy rules mentioned above. If you are planning to marry or form a civil partnership after making a Will, then a contemplation of marriage/civil partnership clause can be incorporated into the Will to prevent it from being revoked once the marriage/civil partnership has taken place.
In contrast, divorce does not revoke a Will. Instead, the ex-spouse is deemed as having already died. For example, Mr Smith has a Will stating that his entire estate should pass to his wife on his death. A couple of years later, the relationship breaks down and they divorce. Mr Smith has not made a new Will following the divorce, so his current Will remains valid. However, on his death the gift of his estate to his wife fails, as - due to divorce - she is treated as predeceasing him. In Mr Smith’s case there were no substitute beneficiaries, so the gift of his estate would pass in accordance with the intestacy rules.