Inheritance planning for military officers

As a senior member of the armed forces, it is easy to focus on the day-to-day execution of your professional duties and not find time to put in place a plan for what might happen if you or your partner should die.  

Many senior officers will have built up significant wealth and assets during their service.  It is only right that you want to protect this and make a conscious choice as to who you wish to pass this to on your death.

Topics to be answered in this article

What is Inheritance planning?

Inheritance planning is not only a financial opportunity in terms of potential tax saving, it is also an opportunity to ensure that you leave your assets to the people you wish to receive them in the most efficient way. 

Why is a Will so important?

Without a Will in place, your assets will pass in accordance with the Intestacy Rules, a set of statutory provisions the govern that administration and distribution of a person’s estate. 

Inheritance Tax

Inheritance Tax is a tax on assets that are over a certain amount on death.  Generally, assets transferring between spouses on first death are exempt from Inheritance Tax and therefore tax is due when the surviving spouse dies.  Each individual has an available allowance of £325,000 which can be left without incurring any tax. If this is not used by the first spouse, it can be transferred to the surviving spouse in order to utilise all allowances. 

This is called the Nil Rate Band and the available allowance is subject to any gifts made during a person’s lifetime.  If you own a property and leave this to lineal descendants, then you are also eligible to apply for a further £175,000 allowance before incurring any tax.  This is called the Residence Nil Rate Band.  Any capital left on death over the available allowances will be taxed at 40%.  These allowances apply to UK domiciled persons and therefore even if you are stationed abroad when you die, if you are UK domiciled then UK Inheritance Tax will still apply. 

Armed Forces IHT exemption

As a member of the Armed Forces, if you die whilst on active service, die later from an injury sustained whilst on active service or die whilst responding to emergency circumstances in the course of your duties, the administrators of your estate can apply for your total estate value to be exempt from Inheritance Tax.  

If you have received an award for bravery or for gallant service, the value of that award is exempt from Inheritance Tax.  If your estate falls over the Inheritance Tax thresholds, the administrators of your estate would have to have the award professionally valued and ensure that the value of the award is not included within the total value subject to Inheritance Tax. 

As you are probably aware, you can make a simple Military Will using MOD Form 106.  However, whilst this is better than nothing, it only covers the very basics and often is inadequate in dealing with your actual estate.  

Putting in place a Will ensures you have chosen who will receive your assets, how they will receive your assets and who will be in control of dealing with your estate when you have died.  Wills can range from leaving things simply to your spouse and then your children or using more in-depth provisions to control and manage the way in which your estate is divided and received. 

Use of Trusts to minimise unnecessary tax

Depending on your circumstances, certain types of Trusts can be utilised in Wills.  Two specific types often used are Life Interest Trusts and Discretionary Trusts. 

Life-Interest Trust

The use of a Life Interest Trust in a Will can protect your share of the capital in your property and any assets in your sole name. Assets will be held within the Life Interest Trust for the benefit of the surviving spouse.  This means that the survivor will continue to be able to live in the family home and will receive an income from any other assets.  However, importantly the capital value of the 50% share of the assets will not be included in the survivor’s estate should the survivor’s financial circumstances be subjected to potential vulnerabilities, such as remarriage or bankruptcy.  

Therefore, if the survivor remarries or become bankrupt, the assets held in the Life Interest Trust are protected. The assets will be due to your children absolutely on the death of the survivor rather than to the new spouse.

Discretionary Trust

A Discretionary Trust however, is a type of Trust where your assets are held by a number of people (usually two) who you have chosen, called your Trustees, and they hold these assets for a pool of chosen beneficiaries.  It is at the Trustees absolute discretion how, when and to whom the assets are paid to out of the pool of beneficiaries.  Importantly, no beneficiary has a right to receive assets from the trust, they instead only have a hope of receiving at the Trustees discretion.  

You would prepare a letter of wishes, which can be updated throughout your lifetime, to set out your reasons and wishes for the distribution of assets from the Discretionary Trust.  The letter of wishes is not legally binding but can help your Trustees in understanding your reasons for setting up a Discretionary Trust.  Whilst you cannot guarantee that your Trustees will distribute your assets in accordance with your wishes, it will allow your Trustees to react to the circumstances of your beneficiaries at your death and their ongoing circumstances following your death.  

This type of Trust is very useful for complex situations where the circumstances of your beneficiaries are unknown at the time of writing your Will, such as suffering from health conditions or other vulnerabilities (for example addiction).  

Oversea’s Assets

If you are stationed abroad and have assets in that Country, whilst your UK Will can deal with your worldwide assets, it is often advisable to seek specific advice in the Country where you hold assets.  This is to ensure that your foreign assets can pass how you want them to without contravening the inheritance laws in the Country where they are held.  

An increase in statutory legacy

As from 26 July 2023, the fixed sum, known as the ‘statutory legacy’, passing to a surviving spouse or civil partner when a person dies leaving children and without having made a valid Will, has been increased to £322,000. This has increased from £270,000 which has been fixed since February 2020

The intestacy rules provide for a deceased’s estate to be distributed in a certain way depending on the value of the estate and the surviving family members. If the deceased died leaving no children, then everything passes to the surviving spouse or civil partner and the statutory legacy does not apply. If the deceased had children, the surviving spouse or civil partner inherits the personal belongings, the statutory legacy and 50% of the remainder, with the other 50% passing to the children equally.

Where the deceased is unmarried with no children, the estate passes in accordance with a hierarchy of family members, depending on who survived the deceased. It is worth taking note that unmarried partners have no entitlement under the intestacy rules, even if they lived with the deceased as if they were married.

How can Goughs help?

Inheritance planning can seem daunting but it need not be.  Goughs understand that serving in the military can make it difficult to find the time.  Goughs can help and have the experience with both inheritance and helping military personnel.  If you wish to find out more information or start your inheritance tax planning, please do get in touch today.

Author Bio

Samantha Pettersen

I have been practicing in Private Client law since 2018. I was introduced to this area of law during my training contract and I soon realised that this was the area of law that I had a real passion for. I qualified as a solicitor in January 2020 and was promoted to Associate Solicitor in October 2022.

I love the personal interaction with clients and being able to help them with difficult personal and emotional circumstances.

My progression includes being an affiliate member of STEP and a Longstanding Member of Association of Lifetime Lawyers.

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