Rebalance your affairs to help secure your legacy

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Being able to hand some hard-earned savings onto the next generation, for example to help them get a foot on the housing ladder or pay for children’s education, is something that most people strive to attain.

Family business owners will also be well aware of the importance of succession planning. The topic was even the basis of hit TV show Succession with people glued to watching the in-fighting between patriarch and media mogul Logan Roy and his competitive children.Meanwhile, Inheritance Tax (IHT) is a complex area where people often realise the benefits of professional advice to ensure they are leaving their family as much wealth behind as possible.

There has been talk of changes to IHT if – as polls are currently widely predicting – Labour comes to power following the 4 July election. However, in Scotland, there has recently been changes to succession law which experts believe people need to be aware of and plan accordingly.

These changes are included in the Trusts and Succession (Scotland) Act 2024 which is designed to modernise the law on trusts, succession and executors. The Act could also impact those who die without having a will in place – known as “intestate”.

Caroline Pringle, personal law partner at Anderson Strathern, says: “Notably the new Act changes the order of intestate succession where a person dies leaving a spouse or civil partner but no children. Intestate succession is where someone dies without a will. It is estimated that less than half of UK adults have a will.

“Now spouses rank second to children on intestacy. Parents and siblings ranked second to children previously after a spouse’s Prior Rights and Legal Rights, which take priority.”

She adds that the law now reflects what most married couples would presume would be the case. Where there are no children, married couples will inherit the entire estate of their spouse on intestacy.

Turning to unmarried couples and those not in a civil partnership, Pringle says that cohabitants can currently make a claim on the death of the predeceasing cohabitant but only where they died without a will. The new Act has extended the time period for making such a claim from six to 12 months.

 “It may be that we see larger sums awarded to cohabitants where they die without children to mirror the position if they were spouses but this would be at the discretion of the judge,” she adds. “Married couples or civil partners have automatic rights. Cohabiting couples do not.”

Pringle points out that IHT legislation largely favours marriage and civil partnerships where both are domiciled in the UK. “There is the spouse exemption for IHT. This means that where you leave your estate to a spouse or civil partner it passes free of the tax.  IHT nil-rate bands are also transferable between spouses The same does not apply for cohabitees. Where you have children or direct descendants and you have a residence which you pass onto them, you can also benefit from the Residence Nil Rate, band which is an additional amount that can pass on death without any IHT being payable.”

She concludes that people should put a will in place to ensure that their wishes are clearly set out and, if IHT is a concern, seek specialist tax and succession planning advice.

Olawale Adeosun, head of regional wealth planning and family governance at LGT Wealth Management, agrees on the importance of wills: “The need to have a valid will in place remains ever more important. The legislation now means separated spouses, who are yet to formalise a divorce, could still benefit from the estate, which might be the last thing intended by the deceased spouse.”

Elliot Guthrie, chartered financial planner at Calton, says: “The new provisions of the Act for married or cohabiting couples mainly relate to cases in which one partner dies intestate. While some new provision is made for cohabiting couples caught in this situation, the rules of responsible planning remain paramount – it is still preferable that both parties have up-to-date and professionally written wills to ensure that their wishes are followed.”

While cohabiting partners now have 12 months to make a claim on a partner’s estate where their partner died intestate, Guthrie says it should be noted that this has not changed the IHT treatment. Any estate in excess of the deceased partner’s available nil-rate band will still potentially be liable for IHT.

He adds: “Whether you are married or cohabiting, in addition to wills and Power of Attorney, it is a good idea to check that your life insurance is in trust. Not only does this usually speed up pay-outs, reducing the anxious wait to clear mortgages or fund funeral costs, it is also a good, simple, cost-effective way of mitigating IHT.

“Your insurance company will confirm whether your policies are in trust. If they are not, consult a financial planner or solicitor to review this. It’s also worth noting that some older-style pension plans may form part of your estate for IHT purposes and may offer limited death benefit options for your loved ones. Following rule changes in 2015 and 2023, now is a good time to review this as part of your overall financial planning.”

According to Drew Nutsford, director and chartered financial planner at Waverton Wealth, IHT and interspousal gifting rules continue to favour married couples over cohabiting couples. He says: “For many cohabiting couples, getting married is the simplest solution to provide financial security for the surviving partner and defer IHT until after the second death occurs. This is because if you make a gift to your spouse or civil partner during your lifetime or on death, it is exempt from IHT, provided they meet UK domicile rules.

“It is the complete opposite for cohabiting couples. [They] can only inherit up to the available nil-rate band, capped at £325,000, without being subject to an IHT liability of up to 40 per cent on the excess.”

He adds that when the cohabiting couple have children, the unfavourable legislation surrounding the Residence Nil Rate Band means the additional amount of up to £175,000 will not be available if the will states the surviving partner is to inherit the family home rather than the children.

“IHT planning is complicated for married couples. For cohabiting couples, the unfavourable legislation requires additional financial and legal planning to minimise the financial impact on the survivor and manage the complexity of various rules and legislation depending on inherited assets,” he says.

There are several structures a cohabiting couple can put in place to maximise the wealth that the surviving partner can inherit, adds Nutsford. “There is no one-size-fits-all solution, depending on overall wealth, family dynamics and financial goals will help determine the right approach. Another challenge both married and cohabiting couples face is avoiding ‘sideways disinheritance’. This is a major topic of consideration for blended families,” he explains.

Tom Munro, financial planner with McHardy Private Wealth, says: “Married couples typically have automatic legal rights and protections in areas such as inheritance, property ownership, and financial support upon death or separation. Cohabiting couples may not have the same automatic legal rights and protections unless they have important and specific legal agreements in place, such as cohabitation agreements or wills.

“In the context of UK legislation on IHT, changes in Scottish law may influence the administration and application of IHT in Scotland. It is important to consider how any changes in Scottish succession laws, including those introduced by the Trusts and Succession (Scotland) Act 2024, may interact with existing UK legislation on IHT to ensure compliance and understanding of the implications for individuals and families in Scotland,” explains Munro.

“As ever, It is highly advisable to consult with a legal professional or refer to the specific provisions of the Act for accurate and detailed information on any potential disparities between married and cohabiting couples in relation to trusts and succession.

“Any subsequent financial planning should be relatively straightforward once any potential inequalities have been resolved.”