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The Link Between Wills and Inheritance Tax

There is a strong link between Wills and Inheritance Tax (IHT), its a fact that with the right planning correctly communicated through your will you can reduce your exposure to IHT. Unfortunately, many never get around to setting up a will and become what’s known as intestate.

Dying intestate results in your estate becoming subject to intestacy laws which is a slow process that controls how your property will distributed upon your death and may end up being given to the government if you have no living relatives. Your estate includes money in bank accounts, savings, shares, property and other assets you own at the time of death, if you have a large estate your exposure to Inheritance Tax becomes greatly increased.

So having a Will in place is highly recommended and If you already have a Will then you should ask yourself when was the last time you reviewed your Will.

How do I go about getting a will?

If your circumstances are simple you can write your own will which is valid as long as you get it witnessed and it contains all of the formal requirements, you can also consider using a will-writing kit, which are available from most stationers. However, you should bear in mind that a will that is badly worded could lead to misinterpretation and result in your relatives being saddled with large legal fees whilst its meaning is agreed.

Another possibility is the use online services such as http://www.tenminutewill.co.uk or use a personal Will writing service which should ensure the language and terminology used cannot be misinterpreted and ensure your final intentions are clear. Will writing is not regulated by the government although there are several voluntary bodies, such as the Society of Will Writers and the Institution of Professional Will Writers. To be 100% confident your will is dealt with by a qualified person and you have consumer protection we recommend using the services of a solicitor or member of the Law Society.

What to consider when you make a will?

You should do everything you can to make sure that your wishes are not contested. Make sure you do not ask any of the beneficiaries of your will to help draft it. Older people may ask grown-up children to help them write a will, but this means the will could be challenged by other potential beneficiaries. Make sure your will is properly signed and witnessed by two people who are not beneficiaries.

You will need to decide who your executors are. These are the people who will administer your will. You can pay for a bank or solicitor to do this, or a friend can offer to do it for free however please remember being the executor of a Will can be demanding.

Other items to consider are:

  • Do you have assets that you would like to give to someone in particular.
  • If you have young children, you will need to appoint guardians.

What about tax planning?

Inheritance tax is 40 per cent, but it is known as the “voluntary tax” because it is relatively easy to get out of paying it with proper planning. Anyone who dies with total assets of more than £325,000 could leave their family with a tax liability. But if you leave your assets to your spouse or civil partner, no tax is payable. If you want to avoid tax and leave money to your children talk to Bourne Accounts for advice on setting up a discretionary trust.

You could also:

How much should a Will cost?

To save money, check if your employer, union or home insurer offers a free or discounted solicitor will-writing service. Some insurance policies provide a legal “add-on” you can use to have a will checked. If you are on a low income, aged over 70 or disabled you may be entitled to legal aid.

Will Aid is an annual fundraising campaign involving nine of the UK’s leading charities, with the support of solicitors who donate their skills for free. They encourage people to have their Will drawn up by a professional solicitor in exchange for a charitable donation. Expect to pay a voluntary £95 per single person and £150 per couple. Visit www.willaid.org.uk for more information.

Where do I keep my will?

If a solicitor has made the will, they will usually store it, or you can pay an annual charge to have it stored at a bank. You can keep it yourself, but this is not the safest option.

How often should I review my Will?

If you get married, divorced or have a child, make sure your will reflects this. Ensure that it is properly changed – either with an official change called a codicil if the change is minor, or by making a new will. Either way, make sure the changes are witnessed.

These and many other scenarios, particular to your circumstances, may be available. The key is to explore these planning strategies before the burden of responsibility for settling tax is passed to your executors, and ultimately, your family and beneficiaries.

The Importance of Making Wills and Inheritance tax

If you would like personal advice concerning Wills and Inheritance Tax in order to reduce the burden for your loved ones and ensure that you have all the right plans in place to ease your family’s inheritance tax costs, contact our very own IHT expert Paul Johnston at Bourne Accountancy online or call 01883 708090.

Bourne Accountancy also provides free business advice via our website www.bourneaccountancy.co.uk, and dedicated IHT site http://inheritance-tax.bourneaccountancy.co.uk. We cover the following areas should you wish to meet in person: Addington, Ashtead, Banstead, Biggin Hill, Beckenham, Bletchingly, Bromley, Chipstead, Caterham, Carshalton, Coulsdon, Crawley, Croydon, Dorking, Godstone, Horley, Kenyley, Lingfield, Merstham, Oxted, Purley, Redhill, Reigate, Sanderstead, Selsdon, Shirley, Sutton, Tandridge, Tatfield, Warlingham, Westerham, Whyteleafe.

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Understanding Who Pays Inheritance Tax

The simple answer to the question Who Pays Inheritance Tax (IHT), is that Inheritance Tax (IHT) is due when a person’s estate (their property and possessions) is worth more than the ‘IHT Threshold’ when they die and the elected Executor of the deceased will need to make the necessary arrangement to pay the tax.

The current IHT Threshold is £325,000 per person however this is doubled to £650,000 for a married couple (on condition that the first person to die leaves their entire estate to their partner).   Anything over the IHT Threshold is then subject to Inheritance Tax which is currently 40%, although the rate may be reduced to 36% if more than 10% of the estate is left to charity.  Should the estate’s value fall below the threshold the Executor will still need to report it to HMRC.

So who pays Inheritance Tax when you die.

Usually the Executor or personal representative for the person who has died pays IHT using the funds from the estate.  If the estate has been held in Trust then the Trustees are responsible for paying the IHT .   Trusts are a tax efficient way of looking after assets (money, investments, land or buildings) for people and we will discuss Trusts in another article.
If you have received an inheritance or a gift from someone who has died then normally IHT will be deducted before you receive it, unless:

  • it states in the will that the recipient should pay Inheritance Tax
  • the deceased’s estate can’t pay it

Other factors to be aware of include:

  • Some gifts you give while you’re alive may be liable for IHT after death, depending on when the gift was given however ‘taper relief’ might mean the Inheritance Tax charged is less than 40%.
  • Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill. Contact the Inheritance Tax and probate helpline about Agricultural Relief if your estate includes a farm or woodland.

Reducing your Exposure to IHT

The use of Trusts or Gifting Assets area a couple of methods which can be employed to reduce Inheritance Tax due on death, but it’s necessary to reorganise your estate while you are alive. There are complicated rules that set out how these strategies can be used so we highly recommend you discuss the full options available to you with our staff at Bourne Accounting.

For instance; Married couples and registered civil partners are allowed to transfer assets to each other during their lifetime or when they die without incurring an Inheritance Tax charge. There is no limit to this relief as long as the receiving spouse or civil partner is UK domiciled. This relief is known as the spouse or civil partner exemption (nil rate band).  The basic tax-free threshold available when a wife, husband or civil partner dies can be increased to as much as £650,000 if none of the £325,000 threshold was used when the first of the couple died.   If the entire estate is passed to a surviving spouse or civil partner no Inheritance Tax would be payable due to the spouse or civil partner exemption, so for these couples the nil rate band used to be potentially wasted on the first death. To counter this, legislation was introduced that allowed the unused nil rate band on a first death to be passed, by claim, to the surviving spouse. This applies to second deaths on or after 9 October 2007.   This additional relief should be taken into account when you are planning your estate tax position. Evidence of the position from the first death should be retained.

Rules of intestacy/ intestate

If you die intestate (without a valid will) the rules around who pays Inheritance Tax change and your personal representatives will have to distribute the estate according to the laws of intestacy.
Many people die without making a Will. In legal terms, this means they die “intestate”. When this happens, the estate must be shared out according to certain rules. Individuals who may benefit under these rules are:

  • Married partners and civil partners at the time of death. This includes separated partners but not divorced partners or a civil partner if a civil partnership has ended.
  • Children, grandchildren and great grandchildren, if the estate is over a certain amount.
  • Parents, brothers and sisters, nieces and nephews.
  • Grandparents, uncles and aunts.

The order in which estates of those who die intestate are distributed follow strict rules. For example:

  • if there is a surviving partner, a child will only inherit from the estate if it is valued at more than £250,000.
  • Partners who are unmarried, or not in a formal civil partnership, have no claim on their deceased partner’s estate.
  • When family groups are affected by divorce, re-marriage, or co-habiting and there are children involved, the actual rights of family members to share in a deceased’s estate can be complex, and may result in assets of the estate being distributed in a way at variance with the unwritten wishes of the deceased person.
  • The estates of persons, who die intestate and have no relatives, are passed to the Crown under the “Bona Vacantia” rules.

For these reasons, everyone should prepare a Will and make their intentions known and legally enforceable.

Understanding who pays Inheritance Tax

If you are concerned about inheritance tax costs being a burden for your loved ones, ensure that you have all the information you need to ease your family’s inheritance tax costs by consulting with Paul at Bourne Accountancy online or call 01883 708090.  Bourne Accountancy also provides free business advice via our website www.bourneaccountancy.co.uk, and dedicated IHT site http://inheritance-tax.bourneaccountancy.co.uk. We cover the following areas should you wish to meet in person: Addington, Ashtead, Banstead, Biggin Hill, Beckenham, Bletchingly, Bromley, Chipstead, Caterham, Carshalton, Coulsdon, Crawley, Croydon, Dorking, Godstone, Horley, Kenyley, Lingfield, Merstham, Oxted, Purley, Redhill, Reigate, Sanderstead, Selsdon, Shirley, Sutton, Tandridge, Tatfield, Warlingham, Westerham, Whyteleafe.