The tax efficiency of a well written will

By January 7, 2021Financial Planning

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxford).

Many people think that a will’s main purpose is to ensure that your possessions go to the right people upon your death. This is partly right, but a will also holds immense power to help reduce a future inheritance tax (IHT) bill if you plan it carefully. In 2019-20, the UK government collected £5.13bn in IHT receipts – much of which was needlessly paid. How, then, can you ensure that you keep as much as your hard-earned wealth as possible within the family? 


The power of a will

Without a will, your estate is likely to be handled under the UK’s intestacy rules when you die. In which case, your property, money and possessions are unlikely to be distributed exactly as you would have liked – possibly also eroded by extra taxes, such as a 40% IHT charge on the value of your estate over £325,000.

A legally-sound will, however, can help you leverage the wide range of options available to you to mitigate needless IHT on wealth which could otherwise go to your loved ones, or to a good cause. A great example of this is seen in charitable giving. In 2020-21, anything you leave to a registered charity is exempt from IHT. Take the following example:

Suppose you leave an estate worth £360,000 when you die. Assuming none of this comprises your home, this would result in £35,000 liable to 40% IHT – i.e. a £14,000 bill. However, imagine that, instead, you assigned £40,000 to various registered charities in your will. Upon your death this would bring the total value of your estate down to £320,000. As such, no IHT would be due since everything you owned would fall within your IHT-free allowance.

You can also reduce your overall IHT bill by giving at least 10% away to charity. Another case study illustrates how this works. Suppose your estate is worth £500,000 when you die. This will leave £175,000 liable to IHT (i.e. a bill of £70,000). However, suppose that instead you gave £17,500 to charity – comprising 10% of your “net estate” (i.e. the value of your estate after your IHT-free allowance is subtracted). In this case, your IHT rate will be lowered from 40% to 36%. Therefore, the remaining £157,500 of your net estate would be taxed at 36%, resulting in an IHT bill of £57,600 – a significant IHT saving compared to the £70,000 bill mentioned above.

However, charity is not the only aspect of wills that can help you save on IHT. In 2020-21, your estate is exempt from IHT if it all goes to your husband, wife or civil partner. However, the rules of intestacy state the following:

  • You cannot inherit from your former spouse/civil partner if your union is legally ended at the time of their death.
  • Cohabiting partners do not automatically inherit.
  • You may be able to inherit from your spouse/civil partner if you are informally separated.
  • If the person who died has a surviving spouse/civil partner as well as children and/or grandchildren then the first £270,000 of the estate goes to the former. Half of the rest of the remaining estate would then go to the latter.

This latter point is particularly important when using a will to mitigate IHT. Whilst the estate that goes to your surviving spouse/civil partner would be IHT-free, the rest (which would go to your descendants under the intestacy rules) could be liable to IHT. If you want everything to go to your husband, wife or civil partner upon your death, then consider getting a will in place!



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