Tax and writing a will
You should make a will, even if you think you do not have much money or many possessions. A will gives you the chance to set out clearly who should get what from your estate when you die. This not only means that your wishes are likely to be followed after your death, but it makes the administration of your estate simpler for your executor. In addition, you can make sure that you make the best use of the inheritance tax reliefs and exemptions. The following is a brief summary and we recommend you take legal advice before writing a will.
What is a will and what is intestacy?
A will is a written direction by which a person expresses their requirements and wishes as to the distribution of their property after death.
It is important to make a will, because a will means that you can decide who gets what from your estate (your ‘estate’ is all the money, belongings and property that you own), rather than leaving it up to the law. The people who are named in your will as those who will receive assets or cash from your estate are called your beneficiaries.
You appoint one or more people to be an executor or personal representative in your will. This can be a member of your family, a friend or professional person, such as a solicitor. You should make sure that the person knows that they have been appointed.
There is more information on the role of the executor or personal representative on our page What if I am an executor or personal representative?.
As well as making a will you can also have a 'Letter of Wishes', which will make certain requests of your executor. This type of letter is useful for setting out how you want to divide your personal effects and other small, non-valuable items.
You should also make sure that people know where to find your will.
If you die without making a will, this is called dying 'intestate'. If you die intestate, your estate is divided up between your spouse or civil partner and family in accordance with some specific rules set out in the law. This may be different from your own wishes. It also means that some people that you want to benefit from your estate, for example, a partner you are not married to or in a registered civil partnership with, might get nothing.
If you die intestate, the person who will deal with your estate will be called an administrator (executor in Scotland).
The rules for dividing up an intestate estate in Scotland and Northern Ireland are different from those in England and Wales. You can use the quick answer tool on the GOV.UK website to see how an intestate estate might be divided. In Scotland, if you lived with someone before they died but were not married to or in a civil partnership with them you may be able to make a claim on their estate if they have not left a will. Further details can be found in a booklet available on the Scottish Government website. You should note that the Scottish Government is consulting on how intestate estates ought to be distributed.
If you die without making a will and you have no known family, your property passes to the Crown. This ownerless property is known as ‘bona vacantia’. There is more information on unclaimed estates on the GOV.UK website.
Note – in Scotland, whatever a will says, there are ‘legal rights’ that can be claimed by certain people, such as the surviving spouse or civil partner and surviving children. You can find out more about legal rights on the Scottish Government website.
There are also laws affecting other parts of the UK under which family or dependants of a deceased person can contest, in other words challenge, the will if inadequate provision has been made for them in the deceased’s estate. This is a complex area of law and legal advice is likely to be needed.
What things go in a will?
Your will sets out who you want to benefit from your will and how, and who is going to be your executor. It should also cover other things, such as who should look after any children and whether you wish to be buried/cremated etc.
You will also need to make sure that the will is valid by observing the formalities, for example having the will witnessed by two other people.
You should regularly review your will to make sure it is appropriate. In particular, the effect of marriage/divorce or the birth of a child should be borne in mind.
It is usually wise to obtain legal help with drafting a will. There is a section on the GOV.UK website providing guidance on this.
You should note that some types of property pass independently of what you might put in your will. For example, jointly owned property will automatically be passed directly to the surviving joint owner. Certain pension, life assurance policies or death in service rights may pass outside your will in the same way.
Do I need to make gifts while I am alive?
If the value of your taxable estate (the sum of all assets after deducting debts, reliefs, exemptions etc) is worth more than the inheritance tax nil rate band when you die, inheritance tax will be payable. Note that the value of any assets left to your spouse or civil partner are not taken into account, provided that they are domiciled in the UK.
You can use your will to make sure you don’t pay more inheritance tax than you need to. It is usually wise to obtain help with this and we tell you more in Where can I find more information? at the bottom of this page.
If you think your taxable estate might exceed the inheritance tax nil rate band when you die, you might want to consider making some lifetime gifts as these can help reduce the value of your estate and therefore your exposure to inheritance tax. Broadly speaking, if you make any gifts in your lifetime and do not die within seven years of making them, then they will not be counted as part of your estate on death and will therefore not be liable to inheritance tax. Before making any gifts though, you should ensure that your own needs can be met from what will be left in your own hands after making gifts.
There are certain gifts you can make in your lifetime which are completely exempt from tax, whether you survive seven years or not, for example annual transfers not exceeding £3,000 and some gifts in consideration of marriage.
We give some general guidance on lifetime gifts on our inheritance tax page. But if you have an estate valued over the inheritance tax nil rate band, it is advisable to seek advice, for example from a Chartered Tax Adviser or a member of the Society of Trusts and Estates Practitioners (STEP), on the likely inheritance tax consequences of lifetime gifts.
If you own your home, it becomes part of your estate when you die, which means your estate may be chargeable to inheritance tax. Whether or not inheritance tax is due depends on the value of your total estate for inheritance tax purposes and who you leave your home to.
If you own your home as a joint tenant with your spouse or civil partner, when you die, your spouse or civil partner will automatically inherit the home. What you have put in your will does not affect this. There is no inheritance tax to pay in respect of the home on the death of the first partner, because transfers to your spouse or civil partner are exempt for inheritance tax purposes. Nor does any other type of gift to your spouse or civil partner use any of your inheritance tax nil rate band.
If your spouse or civil partner is not domiciled in the UK, you may need to seek advice from a tax adviser because only £325,000 of gifts are exempt.
If you own a property as a tenant in common with another person, whether or not they are your spouse or civil partner, you each own a share of the property. This means that you can use your will to leave your share in the property to whomever you choose. If you leave your share to your spouse or civil partner, there is no inheritance tax due, as explained above. You may, however, choose to leave your share to your children, for example. The transfer to your children is not exempt for inheritance tax purposes, provided that they are domiciled in the UK so there may be inheritance tax due on your estate if its value (including the share of the property you have transferred to your children) exceeds the nil rate band.
In Scotland, jointly owned property normally passes direct to the other co-owners upon death unless the survivorship destination has been evacuated. If it has, then, the position is as mentioned above for tenants in common.
From 6 April 2017, the value of an estate that can be left without inheritance tax being charged increases if the deceased leaves a residence (or former residence) to his or her direct descendants. Instead of the basic nil rate band of £325,000 in 2019/20 it may be increased up to £475,000, depending on the value of the residence. Relief might also be due if a residence was sold before death, for example because the deceased had to go into care. This extra residence nil rate band is explained further on our website.
For more information on inheritance tax and death, go to the page What is inheritance tax?.
Are all assets passed on in accordance with my will?
Most are but there are some exceptions. For example, as mentioned above, a property jointly owned may or may not pass in accordance with the will – it may pass automatically to the other joint owner. Similarly, other joint assets (for example joint bank accounts) may pass directly to the other account holder(s).
There are other funds that may become payable on death – for example life assurance policies or payouts from pension funds – and these will not normally pass into the deceased’s estate and be passed on to the beneficiaries of the will. Instead, these assets are often paid direct to beneficiaries at the discretion (choice) of the insurance company or pension provider, although they are likely to take into account any wishes expressed by the deceased. It is therefore important to make your wishes known the administrators of any such funds as this can ensure the funds may be paid out more quickly and to the people you wish to benefit.
Note that in Scotland spouses, civil partners and children have certain prior and legal rights to an estate, regardless of whether they are mentioned in a will.
Can I reduce my inheritance tax liability by leaving something to charity in my will?
Gifts to charities, like gifts to spouse or civil partners domiciled in the UK, are exempt from inheritance tax, whether made within your lifetime or on death.
If your taxable estate is worth more than the inheritance tax nil rate band (currently £325,000) when you die, inheritance tax may be payable. The rate of inheritance tax on death is 40% – this only applies to the part of the estate that exceeds the £325,000 threshold.
Inheritance tax will be due at a reduced rate of 36% if you leave at least 10% of your estate to a qualifying charity.
There is some more information on the GOV.UK website.
The rules for obtaining the reduced rate are very complex – we suggest that you seek advice if you think you would like to take advantage of them. You can find a tax adviser on the Chartered Institute of Taxation website or the website of the Society of Trusts and Estates Practitioners (STEP).
What happens if the beneficiaries decide that the estate would be better divided differently – Deeds of Variation?
Even if you make a will, sometimes your estate will not be divided in accordance with it.
If all the beneficiaries agree, it is possible for them to vary the way an estate is paid out; or it is possible for some beneficiaries not to claim their legacies or ask that they be paid to someone else if they do not want them. In order to do this, they have to draw up a Deed of Variation.
If there are minor beneficiaries (that, is not yet of full age), or any beneficiary is unable to deal with their own affairs (for example because of a mental health issue), and the other beneficiaries wish to vary the terms of the will, they cannot do this via a Deed of Variation but must apply to the High Court (Court of Session in Scotland) for a Variation of Trusts Order.
Note, that if all a beneficiary wants to do is disclaim the legacy without directing who it should go to instead, a signed disclaimer is usually sufficient.
There is more information in the section What if I am an executor or personal representative?.
There is basic guidance on making a will on the GOV.UK website.
The Money Advice Service website also contains useful information about making a will and the different options available.
If you have significant assets, money or property, you may wish to seek professional advice about inheritance tax planning. You can find a tax adviser on the Chartered Institute of Taxation website or the website of the Society of Trusts and Estates Practitioners (STEP).