Tax advantages of a will

The tax advantages of a will can make a considerable difference to the beneficiaries. The will can be a highly effective way of minimising liability to tax, or of sharing the tax liability of your estate.

Inheritance tax

The main respect in which this can be managed is in relation to inheritance tax (IHT).

In principle, IHT is payable on the estate of all deceased persons before it is distributed to the beneficiaries. It is payable on any estate valued at above £325,000, or higher if part of the estate consists of a primary residence which is going to be left to children or grandchildren.

But there are various exemptions from this, and mechanisms to achieve the most advantageous tax position.

A will can state specifically that a particular gift is to be left free of inheritance tax. This does not reduce the tax payable on the estate, but it ensures that no part of the tax is paid out of that gift. If the gift is expressed to be subject to inheritance tax then deduction may have to be made from the value of the gift, so the beneficiary receives less than stated in the will.

For further information, please see Inheritance tax.

Exemptions

The main exemptions are:

  • an estate left to the spouse or civil partner of the deceased is exempt from inheritance tax;
  • gifts to charity are exempt from inheritance tax, and also, if 10% of the net estate is left to charity, the liability to inheritance tax is reduced; and
  • if the deceased died as a result of active service in the armed forces, as a humanitarian aid worker or member of the emergency services, inheritance tax is not payable.

Additionally, there are certain rules in relation to business or agricultural property which reduce the IHT payable.

Nil rate band

The first £325,000 of the value of your estate is known as the nil rate band. If any part of that band is not used up in your estate then it can be added to the nil rate band of your surviving spouse or civil partner.

People often leave their entire estate to their spouse or civil partner – and that is already exempt from inheritance tax. This means that the whole of the nil rate band is carried over to the surviving spouse or civil partner, and on their death the first £650,000 will not be subject to inheritance tax.

As from the tax year 2017-2018, there is an additional nil-rate band applicable only to residential property.

You can use your will to make a gift of your nil rate band. This is not always necessary, but it may have advantages in certain circumstances.

For further information, please see Nil rate band.