Immediate post death interest
For example, take a situation where ‘Anne’ leaves her estate to her two grandchildren (‘Bob’ aged 16 and ‘Charlie’ aged 14), using fairly common wording i.e., to such of ‘my grandchildren who survive me and attain the age of 25 years and if more than one in equal shares’.
Unless the will varies the provisions, the law says that a beneficiary becomes entitled to income from any interest (even if it’s contingent upon them attaining a specific age) from the age of 18. As Bob will turn 18 within 2 years, his half share of the estate will be an ‘immediate post death interest’, meaning it’s within his estate and when he receives the assets from the estate there may be capital gains tax to pay on any increase. This is particularly relevant with the annual exemption reduced so significantly as of 6 April 2023.
Relevant property regime
Charlie, on the other hand, will not be entitled to the income for another 4 years, and so his share of the estate is taxed under the ‘relevant property regime’. This means that there could be an inheritance tax charge when Charlie turns 25 and receives his share of the funds. However, from a capital gains tax point of view, it will be possible to ‘holdover’ any gain which may be useful.
Residence nil rate band
The residence nil rate band may also be affected where there is an age contingency for grandchildren, which needs to be taken into account. In this example, any share of the property passing to Bob could benefit from the residence nil rate band, but not for any share passing to Charlie. This could increase the inheritance tax payable significantly, depending upon the circumstances.
Ultimate Destination of Funds
Also very important to consider is the ultimate destination of funds. For example, sometimes situations arise where assets are left to grandchildren, but the grandparent does not want their parent to benefit, e.g., as a result of divorce. Under these circumstances, the Will would need to be carefully drafted to ensure that the funds do not ultimately pass to the estranged spouse
Legacies to minor beneficiaries
It is imperative to be careful with wording when leaving an outright gift in a Will to a beneficiary where there is an age contingency. By way of example, if, instead of leaving all of her estate to her grandchildren, Anne had decided to leave £100,000 each to Bob and Charlie if they attain the age of 25, but the remainder of her estate was passing to her daughter Diane, there are a few points to consider:
- What will happen if Bob or Charlie don’t attain the age of 25?
- What will happen to the income generated on the legacy whilst Bob and Charlie are under 25? If there is nothing mentioned in the Will, this could cause inheritance tax issues for Diane, as she will be entitled to the income and it will be a gift from Diane to Bob and Charlie for inheritance tax purposes when they turn 25.
- How will the executors/trustees ensure that the £100,000 remains at £100,000? Was this Anne’s intention, or would she prefer that the £100,000 was invested for Bob and Charlie’s benefit – in which case, the wording of the Will would need to be tweaked.
- The same issues considered above about whether Anne would prefer an ‘immediate post death interest’ trust or a ‘relevant property’ trust.
If you are looking to set up a will including a trust for children or grandchildren, it is best to take professional advice to avoid any unexpected issues in the future. Similarly, if you are an executor or trustee of a will trust for children or grandchildren, we would recommend taking advice about the tax consequences to ensure you meet your duties to the beneficiaries
For further information or assistance with making a will, please contact Vicky Timothy on 0161 475 1209 or via our contact form.
Immediate post death interest
By way of example, take a situation where Anne leaves her estate to her two grandchildren (Bertie, 16 and Charlie,14), using fairly common wording i.e., ‘my grandchildren who survive me and attain the age of 25 years and if more than one in equal shares’.
Unless the will varies the provisions, the law says that a beneficiary becomes entitled to income from any interest (even if it’s contingent upon them attaining a specific age) from the age of 18. As Bertie will turn 18 within 2 years, his half share of the estate will be an ‘immediate post death interest’, meaning there may be capital gains tax to pay on any increase when he receives the assets from the estate and its part of his estate for inheritance tax. This is particularly relevant with the annual exemption reduced so significantly as of 6 April 2023.
Relevant property regime
Charlie, on the other hand, will not be entitled to the income for another 4 years, and so his share of the estate is taxed under the ‘relevant property regime’. This means that there could be an inheritance tax charge when Charlie turns 25 and receives his share of the funds. However, from a capital gains tax point of view, it will be possible to ‘holdover’ any gain which may be useful.
Residence nil rate band
The residence nil rate band may also be affected where there is an age contingency for grandchildren, which needs to be taken into account. For example, any share of the property passing to Bertie could benefit from the residence nil rate band, but not for any share passing to Charlie. This could increase the inheritance tax payable significantly, depending upon the circumstances.
Ultimate Destination of Funds
Also very important to consider is the ultimate destination of funds. For example, sometimes situations arise where assets are left to grandchildren, but the grandparent does not want their parent to benefit, e.g., as a result of divorce. Under these circumstances, the will would need to be carefully drafted to ensure that the funds do not ultimately pass to the estranged spouse
Legacies to minor beneficiaries
It is imperative to be careful with wording when leaving an outright gift in a will to a beneficiary where there is an age contingency. By way of example, if, instead of leaving all of her estate to her grandchildren, Anne had decided to leave £100,000 each to Bertie and Charlie if they attain the age of 25, but the remainder of her estate was passing to her daughter Diane, there are a few points to consider:
- What will happen if Bertie or Charlie don’t attain the age of 25?
- What will happen to the income generated on the legacy whilst Bertie and Charlie are under 25? If there is nothing mentioned in the will, this could cause inheritance tax issues for Diane, as she will be entitled to the income and it will be a gift from Diane to Bertie and Charlie for inheritance tax purposes when they turn 25.
- How will the executors/trustees ensure that the £100,000 remains at £100,000? Was this Anne’s intention, or would she prefer that the £100,000 was invested for Bertie and Charlie’s benefit – in which case, the wording of the will would need to be tweaked.
- The same issues considered above about whether Anne would prefer an ‘immediate post death interest’ trust or a ‘relevant property’ trust.
If you are looking to set up a will including a trust for children or grandchildren, it is best to take professional advice to avoid any unexpected issues in the future. Similarly, if you are an executor or trustee of a will trust for children or grandchildren, we would recommend taking advice about the tax consequences to ensure you meet your duties to the beneficiaries
For further information or assistance with making a will, please contact Vicky Timothy on 0161 475 1209 or via our contact form.