If you are concerned about taxes that could be imposed on your Will both during your lifetime and after you have passed away then you should be sure to continue reading. Throughout this article, we are going to be focusing on inheritance, how it’s charged and how you can keep it in mind when planning your Will so that it can be avoided.
What is Inheritance Tax?
When a person dies, the value of their estate is worked out (this means everything that that person owned at the time of death is calculated) and if that valuation comes out at over £325,000, then the overall surplus has an inheritance tax rate imposed on it of 40%. There are a few different things that are taken into consideration when the value of their estate is calculated, including any large gifts that they might have made over the last seven years or so. Gifts made before those seven years might also be calculated; as such, the executors are usually told to look back over a 14-year period.
Due to changes that get made in the law, there are a few exceptions to the nil rate band. One is that if the surviving spouse of a partner passes away after 8th October 2007 and their first spouse didn’t make any use of their nil rate band threshold, then the survivor’s threshold increases to £650,000. Additionally, as of April 2017, there has been an additional allowance of £175,000 introduced, which can be applied when you are leaving a property you had previously lived to some direct descendants.
Inheritance tax tends to get paid out of the estate of the deceased, and the remainder after the tax has been paid will be given to the necessary beneficiaries.
There are some gifts made by the deceased that will not be counted in the value of their estate because they are exempt. Everyone is allowed to give away a certain amount every year completely free of any tax. This includes a personal allowance of £3000, as well as a number of gifts that come to £250 to different people. Also exempt are wedding presents which are limited to £1000, £2500 or £5000 depending on what relation you are to the person getting married.
All gifts that get made to civil partners, spouses and charities are completely free of tax; this applies to gifts made on death or within the individual’s lifetime.
It is also worth noting that any gifts that get made out of your surplus income are exempt. It’s a good idea to try and make use of this as it is a great way to reduce the amount of inheritance tax that will eventually be owned. Your executors will play a large role in this because they are going to need to prove that the income was a surplus to your requirements after all of the other expenditures had eventually been paid.
You’re able to make gifts to individuals or trusts, but it’s important that they are truly given away. You are unable to reserve any kind of right to benefit from the gift the moment it is given or at some point in the future; otherwise, the gift will not have been given away at all.
How Can You Use Your Will to Save on Tax?
There are a number of different ways that you are able to save money on the amount of tax paid upon your death and a Will can help with this. As has been discussed above, any gifts you give to your spouse or civil partner are completely free of tax. Not to mention, there are some assets (like businesses and farming assets) where you will be able to get some relief from tax.
You can divide up your assets so that they are going to individuals who would be subject to paying tax on that asset. For instance, if you leave some business assets to an individual that is a tax-exempt beneficiary (such as a spouse), then it means that they now have two different forms of relief, and as such, one is wasted. You would be better off leaving the likes of property to your spouse and then business assets to next of kin who would not have pre-existing tax relief.
Should You Make a Will Purely for Tax Purposes?
There are a lot of benefits that come with creating your own Will; they don’t just start and stop at tax planning purposes. When you create your own Will, you are taking control of what happens with your possessions and administration after you have passed. This is because you will be able to lay out who your beneficiaries are and who your executors are. If you don’t make a will, then the rules of intestacy will apply and make these decisions for you, which you might not like.
Wills are also helpful if you have children because you will be able to appoint guardians for your children as well as set up trusts that will allow you to control the way that assets are used. You can also protect certain properties and stop them from being used in order to pay for different care fees.
Do You Need Help with Putting Your Will Together?
When you pass away, your possessions will have a value assigned to them and then will be distributed. If the value of your entire estate crosses the nil rate band of £325,000 then you will be liable to pay inheritance tax. There are a number of ways that you can reduce the amount of inheritance tax your beneficiaries will be subject to, and having a well put together will contribute towards this in a big way.
If you want to use a will to plan your tax better, then you should be sure to enlist the help of experts. At Norfolk Will Writing, we have a large team of professionals on hand who are going to be able to talk you through the will-writing process and put one together that has a lot of tax benefits attached. If you have any questions or would like to talk more about putting your will together then please don’t hesitate to get in touch.