Inheritance Tax (IHT) nets the Government just under £3 billion in revenue every year. Despite this huge tax bill, Brits are becoming increasingly aware of IHT and the methods that can be employed to avoid it. In 2009, tax officials told the Guardian that they expected the number of households paying Inheritance Tax to be at its lowest level since 1938.
There are lots of ways that you can reduce the amount of IHT that you pay. However, the simplest and easiest way to begin your inheritance tax planning is to make a will.
Why you should make a will
As well as helping you to reduce the amount of inheritance tax that is due, there are various other important reasons why you should make a will:
- You can decide how you want your assets to be shared out. If you do not make a will, the law decides where your assets go and this might not suit your wishes
- If you are not married or in a civil partnership, your partner will not automatically inherit your assets. A will makes sure that your partner is provided for
- if you are divorced or if your civil partnership has been dissolved you can decide whether to leave anything to an ex-partner who is living with someone else
Using your will to leave your assets to your wife, husband or civil partner
In this situation, there will typically be no IHT to pay. A husband, wife or civil partner counts as an ‘exempt beneficiary’, meaning that you can leave assets to them in a will without paying any inheritance tax. It’s a simple way and effective way of inheritance tax planning.
It is worth remembering, however, that if you leave all your assets to your spouse or civil partner, their estate will be worth more. There may therefore be more IHT to pay when they die.
One exclusion to this rule applies if you are domiciled (have your permanent home) in the UK when you die but your spouse or civil partner isn’t. In this situation, you can only leave them £55,000 tax-free.
Using your will to leave your assets to other beneficiaries
In the tax year 2010/11 you are able to leave up to £325,000 tax free to anyone in your will. £325,000 is the current IHT threshold over which tax is due.
In this situation you can use your will to give some of your estate to someone else or to a family trust. Inheritance Tax is then payable at 40 per cent on any amount you leave above the threshold.
Using your will to leave your assets to a UK charity
Inheritance Tax is not payable on any money or assets you leave to a registered UK charity. These transfers are exempt.