Most people are aware of the importance of making a Will to help ensure that their estate will be distributed according to their wishes. 

If a properly executed Will has been made, it is usually very difficult to challenge. However, if beneficiaries are in agreement, it is possible to vary a Will within the first 2 years of death. 

Additionally, In Scotland, a surviving spouse, civil partner or children are each entitled to certain ‘legal rights’ from the ‘moveable estate’ of the person who died, which can override a Will.

England and Wales do not have the same rights of forced heirship as those in Scotland. However, it can sometimes be possible to make a claim for reasonable financial provision under the Inheritance Act 1975.

Where a Will isn’t made, the estate will be distributed according to the laws of intestacy. The intestacy rules differ depending on where someone is domiciled and who survives them, albeit a surviving spouse will always be the main beneficiary, followed by any children of the deceased.

The Government provides a calculator outlining the intestacy rules in different situations - Note that from 26 July 2023, the fixed sum payable to surviving spouses and civil partners on intestacy in England and Wales has increased from £270,000 to £322,000 (at the time of writing, this has not yet been updated on the calculator).

Do all assets fall into the estate

Although a Will outlines what happens to most assets on death, this is not the case for all wealth. Some common high value assets may not always form part of the estate. For instance:

• The main residence or other property held in joint names – This depends on how the property ownership is structured, which could be either:

• ‘Tenants in common’ – Where the deceased’s share will fall into the estate and be distributed in accordance with the Will or intestacy.
• ‘Joint tenants’ – where the deceased’s share will automatically pass to the surviving owner.

• Pensions – Death benefits under a pension will be distributed according to the pension scheme rules, rather than under a Will or intestacy. In most cases, pension death benefits will also be excluded from the estate for inheritance tax purposes, as long as: 

• death benefits are distributed using a discretionary process, or;   
• where a lifetime income is payable to a beneficiary on death (i.e. on a joint life annuity or beneficiary’s scheme pension).

• Investment bonds – This depends on who owns the bond and who is the life insured. Where:

• The deceased is the owner and life insured* – The bond will end, causing a chargeable event assessable on the deceased and the proceeds will fall into their estate
• The deceased is owner, but not life insured** – The bond will fall into their estate, but the bond does not need to end until the life insured dies.
• The deceased is joint owner and life insured* – The bond will end, causing a chargeable event, with the proceeds automatically passing to the surviving owner.
• The deceased is joint owner, but not life insured** – The bond will automatically pass to the surviving owner and the bond does not need to end until the life insured dies.

• Life insurance policies – These are often put under trust. If this is the case, the proceeds will be distributed under the terms of the trust, rather than the Will or intestacy.
• Other jointly held accounts or investments – These will usually transfer automatically to the surviving owner at the date of death. If the survivor incurs a gain subject to capital gain tax later on, the acquisition cost will be partly based on the date of purchase of the investment and partly from the date of death.

* or joint life insured, on a first death basis

**  or joint life insured, on a second death basis

For assets that are distributed under the Will or intestacy, there are still some specific scenarios to be aware of. These include:

• ISAs – Where the deceased held an ISA, their surviving spouse or civil partner will benefit from an ‘additional permitted subscription’ (APS). This is an increased ISA contribution limit based on the value of the deceased’s ISA.
• Business Relief qualifying investments – Where held for two years or more, certain business relief qualifying investments can receive 100% relief from inheritance tax. These include shares in an unquoted qualifying company (including Alternative Investment Market (AIM) companies), EIS investments or an interest in an unincorporated qualifying trading business.  
• Loan Trusts – Where the deceased has set up a loan trust (commonly used with an investment bond as part of estate planning), the outstanding loan will fall into their estate. Unless planned for prior to death, this could result in the loan needing to be unexpectedly repaid.

Comment 

Many larger estates will hold a wide range of assets at death and how they are dealt with can be complicated. It’s therefore important to understand how different assets are treated.

On estates where inheritance tax is due, this must be paid by the end of the sixth month after the person died to avoid interest being charged. Where there is a tax charge, the 'Direct Payment Scheme' can allow the deceased’s funds to be sent to HMRC directly to cover an inheritance tax charge and enable Probate to be granted. The scheme is available where accounts are held with banks, building societies or National Savings & Investments (NS&I), but not for investments held with other providers.

Important Information

Please note this is for general information only and is based on LV=’s understanding of the relevant legislation and regulations and may be subject to change.

The tax treatment of benefits depends on individual circumstances, and may be subject to change in the future.

The use of this document is at your own risk, and the content should not be used for the provision of professional advice.

LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.