Importance of a will in inheritance tax planning
Many people overlook or put off making a will until it is too late but when it comes to inheritance tax (IHT) planning it plays an important role for families.
IHT is charged on transfers of capital by individuals but may also be payable on:
- certain lifetime gifts;
- wealth on death;
- certain transfers into and out of trusts; and
- certain transfers made by close companies.
On death, the IHT charge can pose a significant headache due to a rate of 40% being charged on that part of the estate that exceeds the £325,000 nil rate band (current rate for 2015/16).
The nil rate band is available to every individual and provided that no chargeable lifetime gifts have been made, then the first £325,000 of the deceased’s estate will be exempt from IHT.
Married couples need to consider whether the first spouse who dies should leave their entire estate to the loved one they leave behind, or only part of it to the surviving spouse and part to other family members such as children or relations etc. Where the estate is left solely to the spouse then the inter-spouse exemption will mitigate any IHT charge but this will increase the value of the surviving spouse’s estate and basically defer the IHT problem to them.
Where the estate is only left in part to non-spouses, then that part that exceeds £325,000 is liable to 40% tax.
In considering who to leave the estate to there are a number of factors that will influence that decision such as:
- size of the combined estates
- needs of the surviving spouse, children or relatives
- care home fees
- IHT reliefs, e.g. business property relief
- children from prior marriages
Where the aggregate estate of the two spouses is sizeable, it may be advisable for the first spouse to die to leave part of their estate to the children outright or in trust. Again £325,000 is the magic amount that can be left to them without incurring an IHT charge, with the balance going to the surviving spouse.
Where there is property within the estate that attracts 100% relief from IHT, such as business property relief, then it would seem sensible not to leave this to the surviving spouse, if possible.
Spouses who want to protect children from a former marriage, should consider leaving a suitable amount in trust. This will then allow the current spouse to enjoy the income arising from the trust assets during lifetime and for the children to take possession of the trust assets outright upon death.
Unfortunately for those couples who are not married or in a civil partnership there is no inter-spouse exemption and IHT must be paid at 40% on the surplus above £325,000 upon each death. Even where there are children involved and part of the estate is bequeathed to them, the IHT position is unaffected.
Because of current property prices many people who traditionally would not be caught up with IHT find themselves having to consider this issue. It is therefore important to have a will drawn up and regularly updated where circumstances dictate be they family matters and/or tax changes.
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