Inheritance Tax Planning And Wills

Planning for the future is an essential aspect of life. Whether you’re diligently saving for retirement, investing in your children’s education, or building your dream home, it’s crucial to consider what will happen to your assets after you’re gone.

One key aspect of this planning is understanding and managing inheritance tax (IHT). In this blog post, we’ll explore inheritance tax planning and Wills to ensure your wishes are carried out as you want them to be and that there isn’t a hefty inheritance tax bill left behind for your beneficiaries.

Inheritance tax on the rise

The Financial Times recently stated that inheritance tax reached a record-breaking monthly level in June 2023, standing at £795m according to HMRC.  This statistic highlights the increasing significance of inheritance tax and emphasises the need for effective planning.

What is inheritance tax?

Inheritance tax is a financial obligation that arises when an individual passes away, leaving behind an estate that incorporates all their assets. 

This includes property, investments, savings, personal possessions, and even certain gifts made during their lifetime. 

Calculating inheritance tax involves taking the total value of these assets and subtracting any outstanding debts and funeral expenses.

In the United Kingdom, the current inheritance tax threshold, also known as the ‘nil-rate band’, is £325,000 per person. 

Estates below this threshold are exempt from inheritance tax, while those exceeding it face a 40% tax rate. 

You can find more detailed information about the nil-rate bands on the Money Helper website.

To reduce inheritance tax liability, individuals can utilise exemptions and allowances, such as the spouse or civil partner exemption, annual gifting allowance, small gifts allowance, and relief for business or agricultural assets. 

Understanding these aspects of inheritance tax is crucial for effective estate planning, as it enables individuals to preserve more of their wealth for their heirs. 

Additionally, the seven-year rule and potentially exempt transfers (PETs) further complicate the inheritance tax landscape, highlighting the importance of seeking professional advice when making a Will and managing assets to minimise tax liability.

How a Will can help manage inheritance tax

Navigating the complexities of inheritance tax can be a challenging endeavour, and it’s essential to explore various options and strategies to reduce your inheritance tax liability. 

One of the most effective ways to manage your potential inheritance tax liability is through careful estate planning, particularly with the use of a well-written Will. 

Seeking legal advice from a professional with expertise in estate planning is often the best course of action. 

Here are some key steps to consider when planning your estate to minimise your inheritance tax bill:

1. Make a Will

 A fundamental aspect of effective estate planning is creating a Will to outline your wishes. 

Without a valid Will, your assets may be distributed according to intestacy rules, potentially incurring inheritance tax. 

Crafting a well-thought-out Will ensures that your assets are distributed as you desire and may help optimise tax efficiency. You can find out more about making a Will here. 

In addition to traditional Wills, there are specialised types of Wills that can be used to manage inheritance tax:

– Life Interest Will Trusts

These trusts allow you to leave your assets to a beneficiary for their lifetime, with the assets not being considered part of their estate for inheritance tax purposes. 

Life interest Will trusts are particularly valuable for married couples and civil partners, ensuring the surviving spouse benefits from the assets while preserving family wealth.

Mirror Wills

Mirror Wills are often used by couples to leave their assets to each other. These Wills ‘mirror’ each other’s provisions, typically leaving everything to the surviving spouse or partner. However, it’s important to consider the potential inheritance tax implications of this approach, as it might not fully utilise available tax allowances and exemptions.

Property Will Trusts

These trusts are designed to protect your family home from inheritance tax. By placing your property in trust, you can ensure it benefits your loved ones while minimising the tax liability.

2. Utilise trusts

Placing assets into a trust is another effective strategy to minimise inheritance tax. Assets held within a trust do not form part of your estate when you pass away. For instance, you can consider placing assets in a trust for your children, which can be accessed when they reach a specific age. This not only ensures your assets are protected but also helps reduce your inheritance tax liability.

3. Bestow gifts

Giving gifts can be a tax-efficient way to reduce your inheritance tax bill. 

In the UK, gifts are generally exempt from inheritance tax if you survive for at least seven years after making them. You can make small gifts of up to £3,000 each year without incurring tax liability. 

Additionally, wedding or civil ceremony presents can have values of up to £1,000 per person, with higher limits for grandchildren and children.

4. Leave assets to charity

Making charitable donations can significantly impact your inheritance tax liability. 

Charitable donations can either be deducted from the value of your estate before calculating inheritance tax or, if 10% or more of your estate is left to charity, it can reduce your inheritance tax rate. 

This is a meaningful way to support causes you care about while also optimising your tax situation.

5. Spend your money

While the idea of reducing your inheritance tax liability is important, enjoying the fruits of your labour is equally essential. 

Spending your money can decrease the overall value of your estate, potentially reducing any inheritance tax payable. 

It’s worth noting that high-value items like cars and artwork may still be considered part of your estate.

Inheritance tax if no Will is in place

If you pass away without a Will, your estate will be subject to the rules of intestacy. This means that the distribution of your assets will follow a predetermined legal process, which may not align with your wishes. 

Additionally, without proper planning, your estate might face higher inheritance tax bills. 

It’s essential to recognise that not having a Will can be a costly oversight, potentially jeopardising your legacy and causing financial stress for your heirs.

The importance of speaking to a professional

Given the complexities and potential pitfalls of inheritance tax planning and Wills, it’s essential to seek professional guidance. 

Estate planning professionals who specialise in Wills and trusts, can provide invaluable insights and ensure that your financial affairs are structured optimally to minimise inheritance tax.

How ELM can help 

At ELM, we are experts in Wills, probate, and trusts. With a track record of assisting over 30,000 clients across England and Wales, we specialise in personalised Wills that precisely match your unique needs. 

Our Will writing service is designed to provide an ideal blend of affordability and dependability, and we can help you navigate the complexities of inheritance tax and the legal intricacies of estate planning.

We offer thorough legal assistance from start to finish, ensuring that your future wishes are handled with confidence and peace of mind.

Final thoughts on inheritance tax and Wills

In conclusion, inheritance tax planning and Wills are integral components of securing your financial legacy. 

With the increasing prominence of inheritance tax, it’s crucial to take proactive steps to manage your estate effectively.

By working with experts in the field, you can safeguard your assets for your loved ones and leave a lasting legacy that isn’t diminished by unnecessary tax burdens.

Contact us 

Do you want to find out more about inheritance tax and estate planning? Our team has a wealth of experience – call us on 0117 952 0698 to speak with an expert, or send a free online enquiry.

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