The tax implications of a will dispute

What are the tax implications of a will dispute?

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When you are involved in a contentious probate case it is important to consider the tax implications of a will dispute.

Tax is often overlooked by individuals who are engaged in an inheritance dispute, particularly when their eyes are firmly focussed on winning the legal argument. However, it is vital that you and your solicitors fully consider how the UK’s tax laws could impact on the estate, especially the tax implications of any proposed settlement.

As inheritance dispute solicitor Chris Holten points out:

“Tax can have a major impact on estates that are subject to dispute and the parties need to consider how our tax laws are likely to affect the financial situation. A good example of the fundamental impact tax can have would be in relation to the claimant’s own nil-rate band allowance for the purposes of Inheritance Tax (IHT).

There are two nil-rate bands within IHT. Tax will be payable, subject to available reliefs and exemptions, to the extent that the net value of the estate exceeds these nil-rate bands. It is available to all individuals and can be set against all asset types on their death.

The point to consider is that a settlement might use up a claimant’s nil-rate band allowance or be subject to IHT.”

Lawyer Naomi Ireson agrees with Chris’ warning, adding that defendants also need to be careful. She has seen an unfortunate case where the defendants (the children of the deceased) were entitled to a tax-free estate of £800,000 by utilising the nil-rate band allowances. This included the residence nil-rate band which is available to those passing on a qualifying residence on death to their direct descendants.

However, because the children entered into a settlement with the claimant by varying the estate on a split percentage basis, the house was no longer able to pass to them and as a consequence they lost the resident nil-rate band allowance which was worth £150,000.

If the settlement had been worded differently (for example, a stipulation that the children pay the claimant a sum equivalent to 20% of the estate) they would have remained eligible to receive the residence nil-rate band and would have been £150,000 better off.

The lesson is that both claimants and defendants need to be aware of the tax implications of a will dispute and take expert legal advice from experienced solicitors.

The tax implications of a will dispute