Inheritance Tax – why you need a will

Inheritance Tax (IHT) is often described as a voluntary tax, as careful planning can significantly reduce the amount due. However, the most basic step in that planning is having a valid and up-to-date will.

Without a will, your estate is subject to the rules of intestacy, which may not align with your wishes and could result in a larger IHT bill for your heirs. A will allows you to utilise exemptions like the spouse exemption and the residence nil-rate band effectively.

The dangers of intestacy

If you die without a will, the law dictates who inherits your estate. This can lead to unintended consequences. For example, if you are married with children, your spouse will receive the first £322,000 of your estate and all your personal possessions. The remainder is divided in half: half to your spouse and half to your children. This rigid structure could force the sale of the family home or a family business to pay out the children's share.

Utilising the spouse exemption

Transfers of assets between spouses and civil partners, both during lifetime and on death, are completely exempt from IHT. A well-drafted will ensures that assets pass to the surviving spouse in a tax-efficient manner. Furthermore, any unused portion of the first spouse's nil-rate band (£325,000) can be transferred to the surviving spouse, effectively giving them a £650,000 tax-free allowance when they die.

The Residence Nil-Rate Band

The Residence Nil-Rate Band (RNRB) provides an additional £175,000 tax-free allowance if you leave your main residence to your direct descendants (children or grandchildren). Like the standard nil-rate band, this can also be transferred between spouses. However, the rules are complex, and if your will leaves the property into certain types of trust, the RNRB may be lost. A professional review of your will ensures these valuable allowances are secured.