Wills and Inheritance Tax Planning

When someone passes away without a Will, their estate (which comprises of everything they own including property, money and digital assets) passes to direct family members in accordance with a statutory checklist called the ‘Rules of Intestacy’ which essentially means that closest relatives inherit the estate. A Will enables someone to dictate what happens to their estate and also plan for inheritance tax to safeguard personal wealth.

• It is a common misconception that a spouse receives someone’s whole estate if they pass away without a Will. This may not be the case if that perso n has children.

• If someone cohabits with a partner, that partner may not receive any of the estate without a Will.

• Individuals can decide who they would wish to look after their children by appointing guard ians in a Will.

• Special inheritance tax rules apply if someone owns a business and Wills can be drafted in a particular way to ensure maximum protection for a businesses’ succession and it’s taxation. If an individual is in a partnership, without a partnership agreement the business will automatically be wound up on the death of one of the partners so a Will/review of Partnership Agreement is essential in these circumstances.

• Lower rates of inheritance tax are payable if someone has an inheritance tax liability and they leave a certain percentage of their est ate to charity.

• A Marriage or Divorce has an impact on a Will, so it is pivotal to gain advice in updating a Will during these circumstances.

What about In heritance Tax?

An individual can plan to safeguard some of their estate from being used to fund care fees, and minimise liability to inheritance tax. Such advice is often given alongside the preparation of a Will. Normally when someone passes away, inheritance tax is payable on all assets over £325,000 (the ‘nil rate band’) at the rate of 40%. An individual may also have an additional allowance of up to £175,000, called the ‘residence nil rate band’, if their residence passes to direct descendants.

Any assets passing to a spouse, civil partner or charity are exempt from inheritance tax so, if the first spouse does not use up their whole nil rate band, on the second spouse’s death the first spouse’s unused nil rate band can be transferred. Similarly, the second spouse can transfer the first spouse’s unused residence nil rate band meaning that a married couple may have up to one million pounds free of tax. Due to the complexity of ensuring that the entire million is available on the second spouse’s passing, it is important to seek legal advice in tax planning.

Inheritance Tax is calculated by adding the value of someone’s assets as at the date of their passing to the value of any gifts made in the 7 years prior to that date. There are reliefs available to reduce the value of an estate, including but not limited to the annual exemption, gifts to exempt Beneficiaries, normal expenditure out of income, small gifts of £250, gifts on the occasion of a wedding or civ il partnership.