Intestacy in England and Wales
When a person dies without having made a valid Will, the legal term for this is intestacy. The estate of the deceased, that is all the property which he owned immediately before his death, passes under the statutory rules which are set out in the Administration of Estates Act 1925, as substantially amended. Apart from the surviving spouse/civil partner, the intestate distribution is, typically, to a class of beneficiaries established at the date of death, eg. children, brothers and sisters.
Children and Issue
Generally speaking, the term “issue” is used instead of “children”, but “issue” has a wider meaning and includes the lineal descendants, ie. children, grandchildren etc. For example, if a child does not survive his parent but is in turn survived by his own children, those children (ie. the grandchildren) will take the share of the deceased parent. Illegitimate children (and their issue) are now entitled to the same rights under intestacy as are legitimate children (section 14 Family Law Reform Act 1969). It is important to remember that personal representatives are given power to distribute the estate on the basis that the only illegitimate children (or issue thereof) are the ones known to them (Section 17 Family Law Reform Act 1969) – thus avoiding potential problems of illegitimate children turning up subsequently. An adopted child is treated as a legal child of the adopting parents and has the same rights as the adopting parents´ other natural children (but generally loses any rights he may have had in law to his natural parents´ estate). Similarly, the natural parents of an adopted child lose their rights on the child´s death under intestacy laws.
Distribution of estate on intestacy
As already indicated, this is governed by the Administration of Estates Act 1925. A key amendment to the rules was introduced by Section 1(1) Law Reform (Succession) Act 1995 which introduced the survivorship rule in respect of spouses (and now civil partners) of intestate persons. Under the current provisions (ie. for deaths occurring on or after 1 January 1996) a surviving spouse/civil partner will only benefit if he or she survives the intestate spouse/civil partner by 28 days. Where the spouse/civil partner does not so survive, the intestate´s estate will be dealt with as if there had been no spouse/civil partner.
Where a person dies intestate, the destination of his estate will depend upon which of his relatives survive him, as set out below:- (NB. in the case of a spouse/civil partner, that person must survive the deceased by 28 days to benefit).
Spouse/civil partner alone (no issue and no parent, brother or sister of the whole blood, or issue of a brother or sister of the whole blood)
Spouse/civil partner takes the entire estate absolutely.
Spouse/civil partner and issue
A. Spouse/civil partner takes
i. All the personal chattels absolutely
ii. £250,000 (the statutory legacy), plus interest at 6% payable from the date of death until the date of payment
iii. A life interest (that is the right to income) in half the balance of the residuary estate with the remainder to children
B. Issue takes
The remainder of the residuary estate subject to the “statutory trusts”. The statutory trusts are broadly speaking accumulation and maintenance trusts vesting absolute rights to income and capital at age 18. Children will share the balance of the estate in equal shares. Where children are adult, they will receive a proportionate share of capital immediately and a proportionate share on the death of the surviving spouse/civil partner who is entitled to a life interest in half of the balance of the residuary estate.
Since the implementation of the Trustee Act 2000 trustees of such statutory trusts in England and Wales have had wide powers of investment. When a child predeceases a parent who subsequently dies intestate, his/her share will be taken by his/her children who are living at the death of the intestate who attain age 18 or marry under that age.
What is included in personal chattels is defined in Section 55 Administration of Estates Act. These would normally include motor cars and accessories, garden effects, domestic animals, linen, china, books, pictures, jewellery, articles of household or personal use, musical instruments, wines and consumable stores. Personal chattels do not include any chattels used at the death of the intestate for business purposes, nor money or securities.
The spouse/civil partner has the right, which must be exercised in writing within 12 months of the issue of the grant of representation, to request the redemption of the life interest and receipt of the capital value instead.
Calculation of the lump sum must be in accordance with the rules and tables laid down in the Intestates Succession (Interest and Capitalisation) Order 1977. Capitalisation of the life interest will be administratively convenient in that it can speed up the distribution of the whole estate. It should be added that where all the issue are of full age and capacity, there can be an agreement that the share of the capital to be taken by the surviving spouse/civil partner and the calculation under the above mentioned regulations will not be needed.
Where the surviving spouse/civil partner occupied the private residence owned by the deceased at the date of death, he or she has the right to require the administrator to appropriate this in or towards satisfaction of any interest that he or she has in the intestate´s estate. Like the right to a capital sum in lieu of the life interest, the right must be exercised within 12 months of issue of the grant. If the value (at the date of appropriation) of the property is greater than the value of the surviving spouse´s/civil partner´s absolute interest in the estate including the redemption value of a life interest, the surviving spouse/civil partner must pay the balance to the administrator in cash.
If the intestate´s interest, say in the private residence, was held subject to a joint tenancy, the surviving joint tenant (in most cases the spouse/civil partner) will automatically receive the intestate´s share by the right of survivorship, wholly unaffected by the intestacy provisions.
Spouse/civil partner and specified relatives but no issue
A. Spouse/civil partner takes
i. All the personal chattels absolutely
ii. £450,000 (the statutory legacy) plus interest at 6%
iii. One half of the residuary estate
B. Specified relatives take
The remaining half of the residency estate passes to
(i) parents (in equal shares if more than one), and if neither survives
(ii) brothers and sisters, or issue of deceased brothers and sisters, in equal shares per stirpes
Issue but no spouse/civil partner
The issue take the entire estate absolutely subject to the statutory trusts (if appropriate).
No spouse/civil partner or issue
The specified relatives take the whole estate in the following order and only if there is nobody in a prior class will the next class benefit:-
- brothers and sisters of the whole blood,
- bothers and sisters of the half blood,
- uncles and aunts of the whole blood, and
- uncles and aunts of the half blood.
* The classes above, except parents and grandparents, take subject to the statutory trusts which provide for the issue of a deceased member of the class to take his share.
In the absence of all the above the Crown, Duchy of Lancaster or the Duchy of Cornwall, as appropriate, takes the whole estate as bona vacantia.
The term “partial intestacy” refers to a situation where an individual leaves a Will which does not dispose of the whole of the estate. This could occur where not all the assets are covered by the Will or where a beneficiary under a Will disclaims his or her interest under the Will. A partial intestacy may also arise where the residuary beneficiary under the Will dies first. The above-mentioned rules of intestacy apply equally to partial intestacy. That is, to the extent that the Will does not deal with particular assets, the above rules will apply as if the estate subject to intestacy was self-contained.
Where an individual dies partially testate and partially intestate, the dispositions in the Will are effected first and the personal representatives then deal with the undisposed property under the partial intestacy. Until the Law Reform (Succession) Act 1995, the hotchpot rules applied which meant the issue and the surviving spouse/civil partner had to bring into account the value of certain beneficial interests received under the Will in determining their entitlement on intestacy. The 1995 Act (section 1(2)) abolished the hotchpot rules in respect of partial intestacy for issue and spouses/civil partners.
The abolition of the hotchpot rules means that where there is partial intestacy, a beneficiary will no longer have his or her fixed net sum under the intestacy rules cut down by the value of any interest she or he takes under the Will. The same applies to children´s entitlements on an intestacy. For example, where there are two children and there is a Will which disposes of half of the estate only, leaving it all to one child, the undisposed half of the estate will be divided equally between the two children, with the result that one child takes three-quarters of the estate and the other one quarter.
Under the old hotchpot rules the child who benefited under the Will would have to bring his share into hotchpot as part of his equal share under intestacy so that the result would be that the whole of the estate would be split equally between the two. Although the latter might seem more fair it might not have been in accordance with the testator´s wishes.
The statutory trusts
Where property passes on intestacy to the issue of the deceased it is held upon the statutory trusts. The term is defined in Section 47(1) Administration of Estates Act 1925 as amended by Section 3(2) of the Family Law Reform Act 1969. Where all or part of the estate is held upon the statutory trusts for issue of the intestate, such whole or part is divided in equal shares between such of the children of the deceased as survive him and reach the age of 18 or marry under that age. If a child dies before the intestate, leaving children living at the intestate´s death, they take in equal shares between them the share which their parent would have taken had he survived – again, subject to their reaching the age of 18 or marrying under that age. This method of distribution is described as being “per stirpes” – according to the stocks – and is in contrast to distribution per capita – according to the heads.
Until the Law Reform (Succession) Act 1995 came into force, the hotchpot rules applied, which meant that certain gifts which the beneficiaries of an intestate received during lifetime had to be brought into “hotchpot” (ie. account) as an advancement, the value to be reckoned as at the date of death of the intestate. Section 1(2) of the 1995 Act abolishes the hotchpot rules on full intestacy only in respect of the statutory trusts for children of the deceased (but not in respect of other classes of relatives, benefiting for example, where no spouse/civil partner and issue survive – abolition of hotchpot for children and spouses/civil partners on partial intestacy has been considered earlier).
Where the children benefiting under intestacy are under age 18, a statutory trust called a Bereaved Minor´s Trust (BMT) comes into effect on the death of the parent for each such child. Under the trust the child will become absolutely entitled at 18. For IHT purposes the trust is exempt from the periodic and exit charges. Before the Finance Act 2006 (which introduced the BMT) the funds would be held on statutory accumulation and maintenance trusts. With regard to income and capital rights under such a BMT trust, sections 31 and section 32 of the Trustee Act 1925 will apply. For full consideration of the application of sections 31 and 32 see the Law of Trusts.
When the beneficiary attains age 18 (or on previous marriage), he or she can demand payment of the capital.
Where a spouse/civil partner and children benefit under intestacy, one half of the residuary estate will be held on another statutory trust – with the life interest vesting in the widow(er)/partner and the children benefiting in remainder. For IHT purposes the spouse´s interest will be an Immediate Post-Death Interest and the spouse exemption will apply subject to the usual conditions.
When statutory trusts apply on intestacy, it will be the administrators who will be the trustees of the trust, although they will have a power to appoint other trustees if necessary or desired. In all other areas of trust administration, the statutory rules will apply, in particular the Trustee Act 2000 in respect of any investments of the trust fund. For more details of this aspect see Trustee Investment.
Capitalisation of a life interest
In what circumstances can a life interest arising under an intestacy or under a life interest trust included in the deceased´s Will, be capitalised? What are the procedures and tax consequences.
In either case, i.e. whether a trust is specifically created in a Will or on intestacy in the circumstances described above, the tax implications are the same. Because of the life tenant´s interest in possession the value of the underlying trust fund is treated as being in the estate of the life tenant and on his or her death there will be a chargeable transfer for inheritance tax purposes when the capital passes to the remaindermen. Any inheritance tax arising by virtue of this chargeable transfer would be payable by the trustees.
Regardless of how the trust is created, it may sometimes be desirable for various reasons to capitalise the life interest and pay off the widow(er)/civil partner. How this can be done differs considerably depending on whether the trust was created under a Will or intestacy.
Where a statutory trust is created on intestacy, section 47A of the Administration of Estates Act 1925 (as amended) provides a statutory right for the surviving spouse/civil partner to redeem his or her life interest in return for a capital value thereof. The surviving spouse/civil partner must elect to have his life interest capitalised within 12 months from the date on which representation of the estate of the intestate is first taken out. (The 12 month limit may be extended by the Court in certain circumstances.) The election is exercisable by the tenant for life giving notice to the personal representatives in writing or, where the tenant for life is the sole personal representative, a notice to the Senior Registrar to the Family Division of the High Court.
In addition to a statutory right to capitalisation there is also a statutory method of calculating the capital value to be given to the surviving spouse/civil partner in lieu of the income. This is laid down by section 47A(2) of the Administration of Estates Act 1925 as amended by section 28 of the Administration of Justice Act 1977 and the Intestate Succession (Interest and Capitalisation) Order 1977. The value is found by multiplying the trust fund by a decimal fraction given in the Order, which fraction varies according to the age and sex of the surviving spouse/civil partner. The result of the calculation will be that the capital sum taken by the life tenant will be less than the trust fund in which the life interest subsisted.
If a life interest is given under a trust created in a Will, there is no automatic right to capitalise, as is the case on intestacy. How can a life interest be capitalised in such circumstances, assuming the trustees have no power to advance capital to the life tenant? The first option is for the beneficiaries to unravel the trust following the principle in the decision in Saunders –v- Vautier (1841). This is possible if the remaindermen are all ascertained, of full age, sound mind and all the beneficiaries are in agreement. Failing that, an application can be made to the Court for a variation of the trust under the Variation of Trusts Act 1958. It should be remembered that in the latter case, the agreement of all the ascertained and adult beneficiaries must first be sought as the Court´s sanction is only given on behalf of the beneficiaries who are minor or unascertained. So, in effect, if one of the adult beneficiaries does not agree to a variation, it will not be possible.
As can be seen, the situation with the will trust is not as straightforward and is certainly more complex than the capitalisation of a life interest under intestacy. A case recently reported in the press illustrates this point.
A 55 year old man with two adult sons and no plans to have more children was a life tenant under a trust. However the trust was drafted in such as way that the remaindermen were defined as “any of the life tenant´s children alive at his death”. Both the life tenant and his two adult sons desired to access capital during their father´s lifetime but this was not apparently possible under the trust. Because of the definition of the remaindermen (which included possible children yet unborn), the trustees of the trust (a firm of solicitors) rightly took the view that it was not possible to ascertain who the surviving children were going to be until the time of the death of the life tenant. Although in the case of a woman, under English law there is a presumption that she will not have children after the age of 55, there is no such presumption in the case of males. Even the life tenant´s offer to have a vasectomy was apparently not good enough as this procedure is reversible. In that case, there was still an option for the individuals to make an application to the Court for a variation of the trust, but as with all Court procedures, this would involve time and money. This case well illustrates the importance of using an appropriate wording in the trust clause defining the beneficiaries.
Where all the beneficiaries of a trust created in a Will are in agreement, it is possible to vary the trust provisions by means of a deed of variation. As long as this is executed within two years of death and the instrument of variation contains a statement to the effect that it is intended that provisions of section 142 IHT Act 1984 should apply, the variation will be read back to the deceased´s will and will give rise to the IHT implications that would have applied had those provisions been included in the Will.
Needless to say, when a variation of a Will trust is made, one would not expect it to result in a higher IHT liability than it would otherwise have been. Where the surviving spouse/civil partner has a life interest under a trust and this is capitalised, resulting in effectively a smaller amount going to the spouse/civil partner, and therefore benefiting from the spouse/civil partner´s exemption, this would mean that a greater amount is going to the other beneficiaries and therefore be potentially subject to IHT. Clearly on the first death of a married couple, it is rather important that the amount going to the beneficiaries other than the spouse/civil partner does not exceed the deceased´s nil rate band, so that no IHT arises on the first death.
It is of course also possible to vary the provisions of intestacy by means of a deed of variation, again within 2 years of death.
So when would a deed of variation be preferable on an intestacy rather than an application to capitalise the life interest under section 47A AEA 1925?
First, as stated above, an application under section 47A can only be made within 12 months of granting of the letters of administration. The limit for deeds of variation is 2 years from the time of death which is likely to be longer. The most important implications are however in the area of inheritance tax. If there is a statutory capitalisation following election, the IHT result is automatic – there is no choice in the matter (as in the case of IHT election under section 142 IHT Act when a deed of variation is executed). If there is a capitalisation under section 47A then the case is always that effectively less goes to the spouse/civil partner and more to the children, which could result in an IHT liability (or an increased liability) if the part going to the children caused the deceased´s nil rate band to be exceeded.
If a deed of variation is executed by virtue of Saunders –v- Vautier, it is of course up to the parties (i.e. the life tenant and the remaindermen), making the agreement, to agree just how much the life tenant should receive in lieu of his/her life interest. The same rules would of course apply here regardless of whether the variation follows an intestacy or a Will provision. If capitalised amount is less than the value of the trust the IHT treatment would depend on whether there is an election under section 142. Remember if there is an election, the provisions will be read back to the deceased´s Will. If there is no election, however, then the original spouse/civil partner exemption would continue to apply but the spouse/civil partner would be treated as making a PET in favour of the remaindermen. As long as he or she survives seven years this would make no difference, although care should be exercised where the asset in question includes a house occupied by the life tenant, in which case there is a danger of the gift with reservation provisions applying. On the other hand if capitalised amount is more than the value of the life interest fund, an election under section 142 may be beneficial as it would save IHT, more of the trust fund then passing to the spouse/civil partner and qualifying for the “spouse” exemption.
As far as the capital gains tax treatment of the capitalisation is concerned, there is nothing specific in the CGT legislation that deals with the capitalisation of a life interest, so that the same principles will apply regardless of whether there is capitalisation on intestacy under section 47A or under a deed of variation on either an intestacy or Will provision. The relevant section, s 62(6) of TCGA 1992, states that a variation made within 2 years of death will be treated for CGT purposes as not being disposal by the beneficiaries but a disposition by the deceased as long as the deed of variation contains a statement to the effect that the beneficiaries intend the provisions of this sub-section to apply. There is no longer a requirement to inform HMRC that a deed has been effected or to make a special election addressed to HMRC. Of course if an enquiry is opened in due course a copy of the original deed will undoubtedly be called for.
It should be noted that the CGT provisions in respect of deeds of variation executed on or after 1 August 2002 correspond to the provisions for inheritance tax – it is no longer necessary to make elections to HMRC Inheritance Tax within 6 months of the deed of variation being executed – it is sufficient to include a statement in the deed to the effect that section 142 IHT Act should apply.
There is sometimes confusion as to when a life tenant of a trust arising on death is entitled to capitalisation. In each case, when such action is proposed, the tax implications should be carefully considered, especially where such action is taking place within 2 years of death (or one year within the grant of letters of administration on intestacy), as, especially in the case of intestacy, different tax implications arise depending on which route of capitalisation is chosen.