When my wife and I got married back in 1999, my wife was divorced from her previous husband and had a six-year-old daughter.
I brought my stepdaughter up as if she was my own and treated her the same as my biological daughter, to the extent that she has nothing to do with her real dad, even though until the age of 16 she did visit him, and was encouraged to do so.
I never formally adopted my stepdaughter, as at the time it did not seem relevant. She decided when she was around ten that she wanted to legally change her name to be the same as mine, which we did.
On my wife’s will and mine my stepdaughter is named as a beneficiary using my family name, as is my biological daughter. She has since got married herself.
Are there any tax implications I should be aware of concerning inheritance tax, due to not formally adopting my stepdaughter.
Would a step child be treated the same as your own child for a valuable inheritance tax perk (file picture)
Currently I believe that the nil rate band of £325,000 plus the residence nil rate band of £175,000, giving a total of £500,000, can be passed on to my children.
Is this still the case for my stepdaughter?
Also do I need to change our wills to reflect her married name? Should the will show her name at birth, my family name, or her married name, or will any of the names be okay as long as she can prove who she is? B.B, via email
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Harvey Dorset, of This is Money, replies: The good news, as discussed by our experts below, is that stepchildren are considered to be no different to biological children for inheritance tax purposes.
Stepchildren fall alongside biological children, grandchildren, and foster children, as being considered as direct descendants, meaning that you can make use of IHT allowances.
That said, there could still be things you can do to make the process easier.
This is Money spoke to three experts to find out what you can do to make to ensure you are ready to pass this wealth on.
> How inheritance tax works – and what families MUST know
Michael Owens: For inheritance tax purposes stepchildren are treated the same as your biological child
Michael Owens, client adviser at Castlefield, replies: Estate planning involving adopted children is a topic that often raises questions and it’s something many people want help with understanding. It’s important to get to grips with the rules around inheritance tax and how they may be applied to your individual circumstances.
Inheritance tax is usually charged at 40 per cent on the value of a person’s estate that exceeds £325,000. This threshold is known as the nil-rate band and everybody’s estate is entitled to this allowance.
An additional allowance of £175,000 may be available if the deceased owned a home that is left to direct descendants. This is referred to as the residence nil-rate band.
The good news is that, even if your stepchild isn’t formally adopted, for inheritance tax purposes they are treated the same as your biological child. This is because individuals considered direct descendants include biological children, foster children, stepchildren and grandchildren. An important distinction to note is that a partner’s child is not considered a stepchild unless the couple is married or in a civil partnership.
As HMRC recognises stepchildren as direct descendants when it comes to inheritance tax relief, the total £500,000 tax-free allowance can indeed apply to your stepdaughter, and you do not need to formally adopt her in order for this relief to be claimed.
There are some occasions when the full residence nil-rate band may not apply:
The total estate must not exceed £2million, otherwise the residence nil-rate band begins to be tapered away (reducing by £1 for every £2 over the £2million threshold).
If the estate is smaller than the combined nil-rate band and residence nil-rate band, or if the value of your home is less than the residence nil-rate band. In these circumstances the allowance only applies up to the value of the estate or the home.
The residence nil-rate band may be forfeited if the deceased’s share of the family home is transferred into certain types of trust rather than directly to descendants.
Your stepdaughter has now married and taken her partner’s surname, but your will refers to her maiden name. This isn’t likely to invalidate her beneficiary status as long as the identity can be proven.
The executor may need documentation, such as a marriage certificate, to show the connection between the old name and the new name. If it’s clear the testator intended to benefit that individual, a probate court will honour that intent even if the name no longer matches exactly.
The probate courts and executors of estates routinely deal with name changes and can manage them with proper documentation, however, it’s generally best practice to keep your will updated. The key point here is clarity. Updating the Will can avoid any confusion later down the line and ensure the correct wishes are followed precisely.
Charlotte Watson: Efficient estate planning really matters to avoid IHT
Charlotte Watson, of Charlotte Watson Financial Planning, a partner practice of St. James’s Place, replies: Yes, your stepdaughter qualifies under HMRC’s rules, which define a stepchild as ‘someone whose parent is, or was, the spouse or civil partner of that person’.
Each spouse has a combined NRB and RNRB total £500,000 per person to pass down to the children free from IHT. If you leave everything to your spouse first then no IHT is due on that transfer.
Any unused allowance, both NRB and RNRB, can be transferred to the surviving spouse meaning that up to £1million could be passed on tax-free between you both to your daughters.
This is why efficient estate and will planning really matters.
Natalie Biggin: Updating your will could reduce delays
Natalie Biggin TEP, director of Welland Valley Legal Ltd, replies: It is always recommended that a will is reviewed at least every five years and/or when a significant life event occurs e.g. your own marriage, divorce, you have a child or a beneficiary passes away.
Should a beneficiary of a will change their name, this will not invalidate your will. The beneficiary is still entitled to the share of your estate under the terms of your will.
However, it would be prudent to update it to make your executors job easier when they come to locate such beneficiary and verify their identity.
It can reduce any risk of potential ambiguity and significantly reduce their time in requesting additional identification documents.
Whilst, it is not legally necessary, nor does it invalidate your will if you do not update it.
Updating your will with their correct legal name could reduce any delays in the probate process for your executors and therefore ensure your beneficiary receives their share of the inheritance more quickly and efficiently.
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