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Will Writing and Inheritance Tax

Drafting a Will
9 mins to read

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.

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What is Inheritance Tax?

Inheritance Tax is usually charged at 40% on the value of an estate above the £325,000 threshold. This threshold is known as the nil rate band (NRB), which is fixed until April 2026.

Your estate includes everything you own, including your home, possessions, money, and other assets. So even if your house is worth less than £325,000, your beneficiaries may still have to pay Inheritance Tax if the total value of your estate exceeds the threshold.

For example:

  • John’s estate is worth £725,000
  • That is £400,000 above the threshold
  • 40% of £400,000 is £160,000
  • Without estate planning, the Inheritance Tax due would be £160,000
  • Jill’s estate is worth £350,000
  • That is £25,000 above the threshold
  • 40% of £25,000 is £10,000
  • The Inheritance Tax due would be £10,000

When you pass away, your estate is valued and HMRC must be notified. They will work out whether any Inheritance Tax is due. This usually must be paid within six months, or interest may be added.

HMRC must always be informed, even if an estate may be exempt. Speak to a solicitor to help make sure everything is handled correctly.

Who pays inheritance tax?

Technically, you pay your own Inheritance Tax because it comes out of your estate. In practice, it is handled by the person managing your affairs after you die.

If you write a will, all debts and taxes are paid by your executor before the rest of your estate is distributed to family, friends, or charities. If there is more than one property, your executor can decide which property is used for the tax calculation.

If there is no will, an administrator is appointed to settle the estate before distributing it according to intestacy laws.

If taxable assets are held in trust, a trustee may be responsible for paying the tax due.

If a gift made in the last seven years is found to be taxable, the person who received the gift may have to pay the tax. If they cannot, the amount may be taken from the estate instead.

In most cases, Inheritance Tax must be paid before probate is granted. In some situations, payments can be made in instalments, such as when funds are tied up in a property that is being sold.

How can you avoid or reduce inheritance tax?

Inheritance Tax is often described as controversial, but there is nothing illegal about arranging your affairs to reduce how much tax is paid. That is tax planning, not tax evasion.

The main reasons to think about Inheritance Tax during estate planning are:

  • To leave as much as possible to your loved ones
  • To reduce stress, administration, and paperwork for your family

Because the tax is paid out of your estate, the best way to reduce or avoid it is to plan ahead and write a will. While you can make a will yourself using DIY wills, a legal professional is usually best placed to advise you on the most effective way to reduce Inheritance Tax.

If you do not have a will, you lose control over who inherits your estate and how much tax your loved ones may end up paying.

Leaving everything to a specific beneficiary

You will not usually pay Inheritance Tax if your will leaves everything to your spouse, civil partner, a charity, or an amateur community sports club. One straightforward way to do this is by writing a joint or mirror will.

You can also give gifts to your spouse or civil partner during your lifetime without them usually being subject to Inheritance Tax. However, your partner should also think ahead about their own estate planning.

Pass on your home

Instead of leaving your home through your will, you may want to transfer it during your lifetime. You can usually give your home to your wife, husband, or civil partner without paying tax.

This is known as a transfer of equity. With help from a solicitor, you may be able to transfer property ownership to family members, which could mean the property is no longer counted as part of your estate.

If you want to carry on living in the property after transferring it and still avoid Inheritance Tax, you generally need to survive for at least seven years and pay market-rate rent and bills. This is why careful forward planning matters. There may also be some transfer of equity costs, although these may still be far lower than the potential tax bill.

Leave your home to your children and top up your tax-free threshold

If you leave your home to your children or grandchildren, your tax-free threshold may rise from £325,000 to £500,000.

This extra allowance is known as the residence nil rate band or main residence allowance. It applies when a home is passed to direct descendants, including children, stepchildren, adopted children, foster children, children under your guardianship, grandchildren, and great-grandchildren, along with their partners.

Using John’s example above:

  • His estate is worth £725,000
  • Using the residence nil rate band reduces the taxable amount to £225,000
  • 40% of £225,000 is £90,000
  • His Inheritance Tax bill drops from £160,000 to £90,000

This additional threshold usually only applies where the estate is worth less than £2 million. Above that, the residence nil rate band is tapered away by £1 for every £2 over the limit.

Transfer inheritance tax thresholds

When one person in a couple dies, it may be possible to transfer any unused residence nil rate band to their surviving spouse or civil partner. This generally applies only if the surviving partner later leaves their home to a direct descendant and the home forms part of their estate.

As a couple, you may have a combined £650,000 Inheritance Tax threshold before taking any residence nil rate band into account. If the first person’s allowance was not fully used, the survivor may be able to transfer it and increase their own threshold. This is usually claimed by the executor.

The government states that the surviving spouse or civil partner does not have to leave the exact same home they once shared in order to qualify for the residence nil rate band or transfer it.

Although the idea sounds simple, the rules are complicated. It is usually best to speak to a legal professional for guidance.

Use your life insurance

By default, life insurance may be treated as part of your estate. That means the payout could be added to everything else you own when your estate is valued for Inheritance Tax.

One common way to avoid this is to place your life insurance policy in trust.

You can often do this when you first take out the policy. If you already have one, contact your insurer to ask whether it can be changed. If the policy is written in trust, the payout usually goes directly to your chosen beneficiaries rather than into your estate.

Life insurance can also be used to help cover an Inheritance Tax bill, such as through a whole-of-life policy or a term insurance policy.

Give it away

One of the most effective ways to reduce Inheritance Tax is to reduce the value of what you own. While you may not want to give away everything before you make your will, you can make gifts during your lifetime. These are often known as potentially exempt transfers.

You will not usually pay Inheritance Tax on gifts to a spouse or civil partner who permanently lives in the UK.

You can also give away up to £3,000 each tax year without it being added to your estate for Inheritance Tax purposes. This is known as your annual exemption.

Illustration explaining inheritance tax gifting rules

You can also give one-off gifts of up to £250 to as many different people as you like. These small gifts are separate from your annual exemption, but you cannot give someone both a £250 small gift and another gift covered by your £3,000 exemption in the same tax year.

For wedding or civil partnership gifts, you can usually give:

  • Up to £5,000 to a child
  • Up to £2,500 to a grandchild or great-grandchild
  • Up to £1,000 to anyone else

Christmas and birthday gifts may also be exempt in some circumstances.

It is important to keep records of any gifts you make so your affairs can be dealt with properly later on.

If you are unsure, speak to a solicitor before making significant gifts.

Inheritance Tax may still apply to gifts made within the seven years before death. This rule is designed to stop people giving assets away in name only while still benefiting from them. If you continue to enjoy the main benefit of a gift after giving it away, it may still be treated as part of your estate.

As time passes, the amount of tax that may apply to a taxable gift reduces:

  • 0 to 3 years after the gift: 40%
  • 3 to 4 years after the gift: 32%
  • 4 to 5 years after the gift: 24%
  • 5 to 6 years after the gift: 16%
  • 6 to 7 years after the gift: 8%
  • 7 years or more after the gift: 0%

There are many different rules and allowances around gifting. Independent advice can be very helpful before you proceed.

How do you get it right in your will?

It is important to make your intentions clear in your will. Because estate planning can involve technical legal wording, many people choose to discuss their circumstances with a legal professional.

Getting things right first time can help reduce the amount of Inheritance Tax that needs to be paid, so more of your estate goes to the people you care about.

Find and compare solicitors and professional will writers who can help with estate planning and will writing, so you can choose the legal professional that is right for you, your family, and your future.

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