Traditionally, Wills of married couples contain a “survivorship” clause. Typically, this provides that, on the death of the first to die, their estate passes to the survivor “if he/she survives for 28 days”. The purpose of the 28 day period is to prevent the estate from passing in quick succession through the estate of the survivor if something unfortunate should happen such as a car accident involving both parties. In the past the survivorship clause was generally seen to have advantages, including the possibility of saving inheritance tax.
Any possible inheritance tax advantage has disappeared following the recent introduction of the “transferable nil-rate band” (TNRB). The nil-rate band, currently £325,000, is the tax-free allowance to which every individual is entitled. If a person’s estate is worth less than £325,000, no inheritance tax is payable. In the past there was a problem where everything passed to the surviving spouse on the first death. The allowance on the first death was effectively left unused and on the second death the single allowance might not be sufficient to cover the value of the combined estate. The TNRB has overcome this problem by allowing any unused allowance on the first death to be claimed on the second death. Potentially, the allowance on the second death can now be doubled up to £650,000. In most cases, this is sufficient to cover the value of the combined estate.
However, the inclusion of a survivorship clause can put a spanner in the works. For example, if a couple have the misfortune of being involved in a car accident and one (A) dies instantly and the other (B) dies a few days later then there may be a problem if A owns all or most of the assets e.g. if the house is in A’s sole name. Take an extreme case where A owns all the assets worth £650,000 while B owns none and both have simple Wills leaving everything to each other and then to the children on the second death. If a survivorship clause is included the result would be that everything passes to the children on the death of A - but with an inheritance tax bill of £130,000! If there had been no survivorship clause then everything would have passed to the children on the death of B - but by virtue of the TNRB there would have been no inheritance tax at all!
If the estate is larger, the result would be much worse if A and B died at the same time and A was older than B. If the assets are worth say £6.5m rather than £650,000 then the inclusion of a survivorship clause would result in a tax bill of £2,470,000 whereas if the clause had been omitted the tax bill would still have been nil!
If your Will contains a survivorship clause then one of our private client lawyers will be able to advise you on whether it should be changed.