I’ve a simple question, what’s a person’s estate?
All They Own
A person’s estate is simply everything they own.
For inheritance tax purposes, one’s estate includes:
- The value of assets in person’s outright ownership.
- The value of the persons half share of any assets jointly owned as joint tenants.
- The value of the person’s percentage share of any assets jointly owned as tenants in common.
- The capital value of any trust in which the person has a qualifying interest in possession (QIIP).
- The value of any assets given away in the person’s lifetime which are still subject to a gift with reservation of benefit
- The value of assets given away in the seven years preceding death; while not part of the deceased’s estate, this is brought into account in calculating inheritance tax on death.
The way to make sure your estate is properly accounted for and your beneficiaries get all, all of your estate, and they don’t pay more tax than they need to is to keep proper records. Records of assets in your name, gifts you’ve made and gifts you’ve received—with dates.
A Person’s Estate: Outright Ownership
The main part of a person’s estate would be the things the person owns outright.
All those things by law that you can give away without asking anyone’s consent.
Your bank accounts, your Rolex, the paintings on your walls, and your motor car.
And probably the most important asset in a person’s estate—your house. Naturally you might have questions of morality or common sense to answer regarding why you gave away your life savings or the roof over your head, but that’s the principle, what you can give away—without anyone’s permission.
You might have encountered unsophisticated souls who recommend you approach this as if you were valuing your possessions for insurance purposes.
Peruse this matter for ten blinks of an eye and you’d realise this is poor counsel, as difference between the replacement value of the contents of a house and the resale value of said items is huge.
If the average house were consumed in a conflagration, replacing the contents of said dwelling would cost some £60,000. Please be insured. The contents of the average home can hardly be given away – in my experience, they’re worth a couple of thousand pounds. There’s a £58,000 discrepancy for a start, be wary lest and so it would build.
A Person’s Estate: Joint Tenancy
Here we’re interested in the value of the persons share of assets jointly owned as joint tenants. All manner of assets may be jointly owned. Two classes of assets commonly tend to be held in joint ownership – they are land and buildings on the one hand, and bank accounts on the other. The third class is interest in small businesses.
We’ll concentrate on the first two groups of assets. Joint ownership is the default form ownership of such. One implication of joint ownership to our purpose is that such assets would pass to the joint owner of the asset by the principle of survivorship.
Say when Imran was at Bath university, he and his mother bought a flat for him as joint tenants and, further, on graduation, he married Sarah. He and his wife built a stylish bungalow, owning it as joint tenants. Imran dies in a motorcycle accident. Irrespective of the provisions of Imran’s will, the Bath flat would pass to his mother, and the bungalow would pass to Sarah. If there is no contrary designation, joint owners are assumed to own assets in equal proportions.
So, all records, both in life and on death would record half of all the assets that were owned as joint tenants. The properties would pass to the respective women, and the inheritance tax matters would be resolved subsequently.
A Person’s Estate: Tenants-in-Common
While this principle of ownership as tenants in common applies to all manner of asset, we’ll concentrate here on land and buildings. With this arrangement on the death of one of the owners of the asset, the ownership of the deceased party’s share passes by the terms of the deceased’s will or the rules of intestacy. The owners thus have the opportunity to designate on the ownership records and especially at land registry what proportions each party holds. If there is no indication to the contrary, the owners hold the asset in equal shares.
Amy had some cash of her own, enough that when she went to Brighton to master civil engineering, she and her uncle bought a flat as tenants in common – uncle owned 44% of the flat and Amy the remainder. On graduation Amy moved to Belfast, and the Brighton flat was held as rental property. On her uncle’s death at 87, his will left his share of the flat to a trust of which Amy’s mum Meera was the beneficiary in the first instance and then further generations of Meera’s family. We note the uncle’s share of the asset passed by his will. If he’d had no will, his share would have been distributed by the rules of intestacy. Without a will, Amy would have got the deceased uncle’s share only if it had come to her by the rules of intestacy.
A Person’s Estate: Value of Trusts with a QIIP
A person’s estate would include the capital value of any trust in which the person has a qualifying interest in a qualifying interest in possession trust
The commonest type of an interest in possession trust is that which arises on the death of a spouse. When Bella and Fiona got married, they wrote their wills so that each of them left their assets not to each other, but each to a trust of which the survivor was a beneficiary in the first instance with further provisions so that o the death of the second of them, the children of the relationship and their further descendants would benefit.
One feature of such arrangements for spouses is that on the death of the first of a couple, no inheritance tax is due, lest the survivor be rendered homeless. On Bella’s death from cancer at 51, her will left her £1.3 estate the sole item of which was her share of their Fulham flat, to a trust of which her wife was the beneficiary. By this arrangement, no inheritance tax is payable till Fiona’s death, otherwise Fiona might have been made homeless. Fiona’s enjoyment of her late wife’s estate in trust is know as interest in a qualifying interest in an interest in possession trust. When listing her assets for inheritance tax purposes, Fiona would state the capital value of the assets in left in the trust consequent upon her wife’s death. For no other purpose would Fiona list this as an asset.
A Person’s Estate: Gifts Subject to GWROB
Here we discuss the value of any assets given away in the person’s lifetime which are still subject to a gift with reservation of benefit GWROB. On the face of it, inheritance tax planners are not fond of gifts with reservation of benefit, because they tend to tie the estate in knots. That’s the general view, nonetheless, the GWROB has been made long before the adviser came on the scene, or there are no tax consequences to the GWROB, or after all is said and done, the GWROB is the best option – just like hospital personnel might inform a patient that amputation of a limb was the best option. Let’s see by example a GWROB.
For instance, your aunt Sally, whose annual mileage is of the order of 400 miles, couldn’t give you her car on condition that it was available for her use (with her, you or a third party behind the wheel). She could not, for inheritance tax purposes, make it a condition that you should have to arrange for her to be able to travel in any degree of comfort, style or convenience.
A Person’s Estate: The 7-Year Rule
The value of assets given away in the seven years preceding death; while not part of the deceased’s estate, this is brought into account in calculating inheritance tax on death.
I’ll put money on the fact that you’ve heard of the seven-year rule. But to restate here, generally the items that comprise a person’s estate are those in the person’s possession. However, to prevent people giving away all of their assets on their death bed, to avoid inheritance tax on their estate, the value of assets they’d given away in the seven years immediately before their death are brought back into the reckoning of the deceased estate. There is sliding scale of inheritance tax due on gifts made depending on the number of years between the date of the gift and the date of death.
Hence when I’m engaged in estate administration, the first thing I do is determine which banks they have accounts with and obtain the statements of all these account for the accounts, This is a fair indication of cash that was given away. This wouldn’t indicate any non-cash items that were gifts, but it would make a good start.
This of course is a moving target. When recording such items, it is essential to record the date and value of the gift. You do not have to declare for this purpose, gifts that were made within the annual gift allowance of £3000, the small gift allowance of £250 per person or gifts between spouses or civil partners irrespective of the value of such gifts.
The moral of the story is to keep records of all your assets, and any gifts you’ve made in the last seven years.