It is likely that at some point you will have to consider your estate or deal with the estate of others and with this in mind, we have created this guide to help you with making a Will, Inheritance Tax (IHT) and dealing with Probate.
Individuals must consider what they will leave and to whom. This is vital as it makes a significant difference to Inheritance Tax (IHT) bills – we advise that you always have IHT in mind when drafting a Will.
Will my family have to pay Inheritance Tax?
An estate is liable to IHT where the value exceeds the Nil Rate Band (fixed at £325,000 until April 2026).
There is an exemption from Inheritance tax when assets or cash are left to a spouse or civil partner of the deceased or a Charity.
IHT is charged on estates at the following rates:
- Below the nil rate band allowance of £325,000, the rate of tax is 0 per cent.
On the balance, the rate of tax is:
- 40% or 36% where 10% of the chargeable estate is left to charity.
In addition to a deceased’s own Nil Rate Band, if they have survived their spouse or civil partner, the estate may take advantage of the unused percentage of the previously deceased spouse’s or civil partner’s Nil Rate Band.
This combined allowance can total up to £650,000 across both estates.
What about the Residence Nil Rate Band?
Where the deceased leaves their home to their children, stepchildren, or direct descendants, their estate can also benefit from an additional residence Nil Rate Band (RNRB) of £175,000. This is also fixed until April 2026.
Additionally, the allowance can be transferred to a surviving spouse or civil partner, meaning that a couple may pass on up to £1 million tax-free.
The allowance starts to be withdrawn where the value of the estate immediately before death exceeds the £2 million taper threshold. The allowance is withdrawn by £1 for every £2 of value, by which the estate exceeds the taper threshold. This means that there will no allowance left on a joint estate worth £2.7 million. It is important to note that the £2M threshold includes assets that may be subject to business property relief, agricultural property relief, charitable relief, etc.
What should I include in a Will to make sure it is tax efficient?
When creating a Will, the following aspects all need to be set out clearly:
- The Executors/Trustees
- Funeral wishes
- Guardianship of your children
- Gifts – these could be charity donations, donations to the needy relations, gifts of personal chattels etc.
We advise you to update your Will to avoid any issues with it later in life. This includes when you are moving house, having children, or entering new relationships. Even if you do not experience a major life event, it is worth reviewing your Will every couple of years to ensure it is up-to-date and reflects your current wishes.
In relation to this, it is also extremely important to create a new Will after marriage and divorce. Once an individual gets married, their previous Will is then void. If you get divorced, your current Will, whilst still valid, may not carry out your wishes as expected.
If you fail to do this, wealth and assets will be distributed according to a rigid and commonly less tax-efficient formula, which could even see former spouses or estranged family members benefit from your estate against your wishes.
For a Will to be valid, it must have ticked all of the following requirements:
- It must be signed by the Testator
- It has been witnessed by two independent witnesses
- You must be of sound mind (mental capacity) at the time of making the Will
- The Will must not be altered or damaged.
We always recommend that you use a suitable qualified and experienced Will drafter to make your Will. We can recommend from our list of suitable solicitors / Will drafters and a few hundred pounds spent now may save a fortune in IHT or legal fees if your Will is disputed.
How can I plan for Inheritance Tax?
With these allowances not due to increase until April 2026, the need to consider Inheritance Tax planning is more important than ever. With the increase in property values, more estates than ever are falling into the Inheritance Tax net.
There are a wide range of measures that can help you reduce Inheritance Tax, including:
- Gifts to family prior to your death
- Gifts to charity
- Business and agricultural property relief
We can provide tax planning advice in connection with the use of trusts, lifetime gifts, exemptions available on qualifying business assets, farmland, and certain tax efficient investments.