Will-writing and inheritance tax

In Drafting a will

Inheritance tax is a tax on your estate that’s paid before your loved ones can inherit. With proper estate planning, you can use your will to avoid or reduce the amount due.

What is inheritance tax?

Inheritance tax is set at 40% of the estate above the £325,000 threshold. This threshold is known as a ‘nil rate band’ (NRB), which is fixed until April 2026.

Your estate is everything you own. Your home, your possessions, your money, and your assets. So, even if your house is only worth £250,000, but everything else you own exceeds the threshold, your beneficiaries will still need to pay.

For example…
  • John’s estate is worth £725,000
  • That’s £400,000 over the threshold
  • 40% of 400,000 equals 160,000
  • So, without proper estate planning, inheritance tax due is £160,000
 
 
  • Jill’s estate is worth £350,000
  • That’s £25,000 over the threshold
  • 40% of 25,000 equals 10,000
  • Inheritance tax due is £10,000

When you pass away, your estate is valued and HMRC must be notified. They will calculate how much inheritance tax, if any, is due. Typically, this must be paid within 6 months, or interest is added to the bill.

HMRC must always be informed – even if an estate might be exempt. Speak to a solicitor to make sure you get it right first time.
 

Who pays inheritance tax?


Technically, you pay your own inheritance tax – it’s coming out of your estate, after all. But it’s dealt with by the person managing your affairs.

If you have a will, all taxes and debts are paid for by an executor before the remaining estate is distributed to family, friends, and charities. If there’s more than one home, your executor can choose which home is used to calculate the tax.

If there’s no will, an administrator is appointed to pay, before distributing the estate according to intestacy laws.
Where taxable assets are in a trust, a trustee will pay any tax due.

If a gift made in the last seven years is deemed taxable, the person who received the gift should pay. If this isn’t possible, the amount is deducted from your estate.

In most cases, inheritance tax must be paid prior to probate. However, in some cases payments can be staggered until funds are available, for example, while selling a property.
 

How can you avoid or reduce inheritance tax?


Inheritance tax is considered controversial – ghoulishly portrayed as a ‘death tax’ in the papers – but there’s no legal reason why you can’t avoid or otherwise minimise how much is paid. This isn’t tax evasion, a far more serious charge.

The main reasons for considering inheritance tax during your estate planning are:
  • Making sure you leave as much as possible to your loved ones
  • Reducing admin and paperwork during a difficult time

Because the tax is paid out of your estate, the best way to avoid or reduce inheritance tax is to plan in advance: write a will. While you can do these yourself using DIY wills, a legal professional will be best-placed to offer advice on properly reducing or avoiding inheritance tax.

When there’s no will, you have no say over who gets what and no control over how much inheritance tax loved ones might pay.
 
  • Leaving everything to a specific beneficiary


You won’t usually pay inheritance tax if your will states you leave everything to your spouse, civil partner, charity, or amateur community spots club. One of the easiest ways to do this is by writing a joint or mirror will.

You may also leave gifts to your partner before you pass away without them being subjected to inheritance tax. But remember, your partner should also plan for minimising inheritance tax.
 
  • Pass on your home

Instead of gifting your home through your will, you might want to pass it on to someone else. As with the rest of your estate, you can give away your home to your wife, husband, or civil partner without paying tax.

This is called a transfer of equity. With the help of a solicitor, you can transfer property ownership to family members – so, it won’t be counted when your estate is valued.

If you want to continue living at home and still avoid paying inheritance tax, you must stay there for at least seven years, and pay rent and bills at the market rate. So, this idea needs forward planning. Don’t forget, there are some transfer of equity costs involved, but (depending on the size of your estate) these are much lower than any tax your family is charged.
 
  • Leave your home to your children (and top-up your tax-free threshold)


If you leave your house to your children or grandchildren, your tax-free threshold – the amount you can give away before being taxed – rises from £325,000 to £500,000.

This is known as a ‘main residence allowance’ or ‘residence nil rate band’ and it applies to what the government call ‘direct descendants: your children and their partners, grandchildren and their partners, great-grandchildren and their partners, step-children, adopted children, foster children, and children under your guardianship.

In John’s case above, then:
  • He has an estate worth £725,000
  • Taking just this step pushes him £225,000 over the threshold
  • Minus 40% of £225,000 means…
  • Inheritance tax drops from £160,000 to £90,000

The tax-free threshold only applies to estates under £2 million. The residence nil rate band is reduced by £1 for every £2 above this limit.
 
  • Transfer inheritance tax thresholds


When someone passes away, it’s possible to transfer any unused residence nil rate band (RNRB) to their partner – but only if the surviving partner leaves their home to a direct descendant and the home is included as part of the partner’s estate.

As a couple, you have a £650,000 inheritance tax threshold. So, if your estate doesn’t qualify for inheritance tax, you could technically double your threshold. Typically, the executor of a will claims for any transfer.

The government states: ‘The home that the surviving husband, wife or civil partner leaves to their direct descendants does not have to be the same home that they lived in with their partner to either qualify for the RNRB or to transfer it.

Transferring your allowance sounds easy, but the legal requirements are very complicated. For this reason, it’s best to speak to a legal professional who can guide you through the proper process.
 
  • Use your life insurance


By default, your life insurance is considered part of your estate. Anything in the pot will be totalled up alongside everything else you own. And, where suitable, it’ll be taxed.

But there’s a really easy way to avoid this.

Put your life insurance ‘in trust’.

You can usually do this when you first take out a policy. If you already have a policy, contact your provider to make this change. By putting the policy ‘in trust’, any pay out goes directly to your heirs, rather than your estate.

You can use your life insurance to pay inheritance tax using a whole-of-life policy or a term insurance policy.
 
  • Give it away


The best way to avoid inheritance tax is to not own anything. But while you’re not going to want to give everything away before you make your will, you could offer gifts to loved ones. These are known legally as ‘potentially exempt transfers’.

You won’t pay inheritance tax on gifts to spouses and civil partners that permanently live in the UK.
You can give away as much as £3,000-worth of gifts every year to loved ones before you’ll be taxed. This is your ‘annual exemption’.
 

 
You can also make one-off £250 gifts to lots of different people. This isn’t included as part of your annual exemption. However, you can’t gift an additional tax-free £250 to someone who has already received a gift under your £3,000 annual exemption.

For tax-free wedding and civil partnership gifts, your children may receive £5,000; grandchildren and great-grandchildren may receive £2,500; anyone else may receive £1,000 in any tax year.

Don’t worry, Christmas and birthday gifts are tax-free, too.

Records of any gift-giving should be kept, to help manage your affairs later.

If in doubt, chat to a solicitor before making a gift.

Inheritance tax is due on any gift for the first seven years of ownership. This is to stop people pretending to give possessions away, while still benefitting from them. If it’s believed that you are still the sole or prime beneficiary of a gift you claim to have given away, you will be taxed on this.

As each year passes, the amount of tax tapers off:

 
Years since receiving gift Inheritance tax percentage due
0 – 3 years 40%
3 – 4 years 32%
4 – 5 years 24%
5 – 6 years 16%
6 – 7 years 8%
7 + years 0%
 

There are many allowances and rules governing gifts. You may find it useful to get independent advice before proceeding.
 

How do you get it right in your will?


It’s important to make your intent clear in your will – and with tricky legalese gumming up the works, you’ll probably want to discuss your circumstances with a legal professional.

Get it right first time. Reducing how much inheritance tax you need to pay means that more of your money goes to those you love.

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