A guide to Wills and Inheritance Tax
The recent COVID-19 crisis has focussed many people’s minds on planning for the future.
It is inevitable that at some point you will have to deal with your estate or the estate of others and with this in mind, we have created this guide to help you through the process of 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.
Transfer of spouse’s Nil Rate Band
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.
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 can 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The allowance starts to be withdrawn where the value of the estate immediately before death exceeds the £2 million taper threshold. The allowance is withdrawn by £1 for every £2 of value, by which the estate exceeds the taper threshold.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.
What do I need to include in a Will?
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. Once an individual gets married, their previous Will is then void.
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.
Inheritance Tax planning
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.
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.
At WMT, we can help you put plans in place to minimise IHT, including a full Will review.
For more help on related matters, please get in touch with our private client partner, Paula Jeffs.