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An Alternative Family Campaign for Recognition by the Taxman

Inheritance Tax Heartache for Livvy Utley and her Two Mums - and What Can be Done Right Now

Twice the Maternal love, but Twice the Inheritance Tax Burden

The Utley family have shared in the national press their heart-warming story of sisterly devotion, and their worries about the way a wholly unexpected turn of events has placed them in a dilemma they’re unsure how to solve. Here are some potential solutions.

Livvy Utley was a surprise blessing to her mother Catherine back in 1993. Catherine was single and knew that she would be bringing Livvy up alone, but her devoted sister Ginda was with her every step of the way, and together they raised Livvy in a happy family of unit three. Livvy always regarded herself as having two Mums, rather than a Mum and an Aunt. Ginda played as important a role in the day to day business of bringing up Livvy as Catherine did.

An unexpected windfall – and a heavy inheritance tax burden

Catherine and Ginda bought a little house together in Battersea, London, when Livvy was small. That house has been their family home ever since. And now that Livvy has graduated from university, she is back home, living full time with her two Mums.  Catherine and Ginda are in their 50’s now, and their thoughts have turned towards later life, and, crucially, making sure Livvy always has her home, even when one or both of them has passed away.

The extent of the boom in property values in London could not have been predicted back in the mid-nineties. Ginda and Catherine would never have believed it, when they moved in, if someone had told them to expect their modest terraced home to be worth £800,000 to £950,000 by 2016.

 And this is where their problem lies. If Catherine or Ginda were to die, a crippling inheritance tax would have to be paid within six months. On 2016 figures, the tax liability would be £30,000 to £60,000. And that liability only going to increase year on year as London property values continue to soar.

For the Utley family, the death of one of the sisters would mean their house having to be sold to raise the money to pay the inheritance tax bill.  The prospect of losing one third of their family, shortly followed by the loss of their family home, is bleak in the extreme.

A “proper family”.

The family understandably feel that the law is unfair to them, because it doesn’t recognise them as a “proper” family. Married couples and couples in civil partnerships can inherit from each other without incurring Inheritance Tax, and their tax-free allowances - their “Nil Rate Bands” -  can be transferred between them.

If Ginda and Catherine had been best friends raising Livvy together, they could have entered into a civil partnership – there is no legal requirement for a sexual relationship between civil partners. But as sisters, civil partnership is not an option that is open to them.

If Ginda had adopted Livvy when she was a child, the impact could have been alleviated to some extent. The new enhanced Nil Rate Band, which comes fully into force in 2020, enables a “direct descendant”, including an adopted child, to inherit a share in the main family home up to the value of £500,000 without any inheritance tax liability. So, both Ginda and Catherine would, by 2020, have been able to use this provision to allow Livvy to inherit at a much reduced, or even fully eliminated, tax burden. But sadly, adult adoption isn’t available in the UK, having been specifically ruled out by the Adoption and Children Act 2002. So, the enhanced Nil Rate Band will only be available to Catherine and not to Ginda.

The Utley sisters are skilfully lobbying MP’s and are hoping that a Bill will be tabled in parliament which, if passed, will enable long-term cohabiting siblings to be treated the same as married couples and civil partners for inheritance tax purposes.

Two possible solutions.

Meanwhile, is there anything the Utley family can do right now to mitigate the burden?

Catherine and Ginda could each gift a share of their house to Livvy, so that the house is co-owned by the three of them. Provided that Livvy remains permanently living at the house, and provided Catherine and Ginda do not receive a “collateral benefit”, such as Livvy taking over responsibility for all the household bills, a gift of that kind would be “potentially exempt” from inheritance tax – i.e. no inheritance tax would be paid if Ginda and/or Catherine lived for at least seven years after the gift was given.

The downside of this is that it limits Livvy’s life choices. If, for example, Livvy got married and moved to another home with her spouse, the “potentially exempt” gift would immediately become a “gift with reservation”, and the inheritance tax advantage would be lost. The key to this kind of gift being effective for inheritance tax purposes is for Livvy to have “bona fide possession and enjoyment”, by living at the house.

An alternative approach would be to use life insurance. Ginda and Catherine could each take out a life insurance policy in amounts sufficient to pay the tax bills on their deaths. The cost of life insurance is at a historic low, and a life policy for £100,000 for a single non-smoking woman in her fifties can cost as little as £40 a month.

For this approach to work for Catherine and Ginda, they would need to bear two important things in mind. First, it’s essential that the policy is “written in trust” for the executors of their wills. That way, on their death, the policy’s proceeds go to their executors to pay the inheritance tax, without forming part of their assets. If their estate assets included the policy proceeds, that would only swell the tax bill.

Second, it would be a good idea to review things every few years to make sure they each have enough cover the pay the eventual tax bill. As the value of their house rises, so potentially would their inheritance tax liability, which might mean they would need more life cover.

At WillWritten, we believe every family is a proper family, and our mission is to empower all families to have their assets protected and their wishes respected. Proper estate planning puts you – not the politicians – in control. So if you’d like to find out more about protecting the interests of your family, feel free to get in touch, either by completing the contact form below, or by calling us on 0151 601 5399.

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