Estate planning is essential for ensuring your assets are distributed according to your wishes and your loved ones are provided for after your death. A key component of this process is drafting a tax-efficient will, which can significantly reduce the inheritance tax (IHT) burden on your estate.
Understanding inheritance tax
IHT is charged 40% on estates exceeding the nil-rate band, currently set at £325,000. An additional residence nil-rate band of £175,000 may apply if a main home is left to direct descendants, allowing a potential total threshold of £500,000 per individual. Any unused allowance can be transferred to the surviving partner for married couples and civil partners, enabling a combined threshold of up to £1 million. However, these thresholds have been frozen until April 2030, and with rising property values, more estates are becoming liable for IHT.
The freeze will likely bring more estates into the tax net. HMRC reported record inheritance tax receipts of £3.9 billion between April and September 2023 – an 11% rise compared to the same period in 2022. This makes careful planning more critical than ever.
The importance of a tax-efficient will
A well-structured, tax-efficient will can help minimise IHT liabilities, ensuring that more of your estate passes to your beneficiaries. By incorporating specific strategies and using available reliefs and exemptions, you can effectively reduce the taxable value of your estate. This can make a significant difference, particularly for individuals whose wealth is tied up in property or other illiquid assets.
Failing to have an updated, tax-efficient will can expose your estate to disputes or unintended tax consequences. Without a will, your estate will be distributed according to intestacy rules, which may not align with your wishes or optimise tax efficiency.
Strategies to consider
- Gifting assets during your lifetime:
Gifts made more than seven years before your death are generally exempt from IHT. Utilising annual gift allowances (£3,000 per year) and making regular gifts from surplus income can further reduce your estate’s value. These gifts are often overlooked but can be an effective way to manage your estate. - Establishing trusts:
Placing assets into trusts can remove them from your estate for IHT purposes, provided certain conditions are met. Trusts can also offer control over how and when beneficiaries receive their inheritance, which can be particularly useful for younger or vulnerable beneficiaries. - Leaving a charitable legacy:
Donating to charity through your will not only support causes you care about but can also reduce your IHT rate. If you leave at least 10% of your net estate to charity, the IHT rate on the remaining estate can decrease from 40% to 36%. This approach combines philanthropy with tax efficiency. - Utilising business and agricultural property reliefs:
If you own a business or agricultural property, these assets may qualify for up to 100% reliefs, significantly reducing their IHT liability. However, recent changes have introduced a 20% IHT charge on business assets over £1m, effective April 2026, so reviewing and updating your estate plan accordingly is crucial. - Pension planning:
Changes introduced in the Autumn Budget 2024 mean that inherited pensions will be subject to IHT from April 2027. This makes pension planning an integral part of a holistic estate strategy. Transferring unused pension allowances and considering drawdown options during your lifetime can help preserve your estate’s tax efficiency.
Recent developments
The Autumn Budget 2024 introduced significant changes to IHT, including extending the freeze on IHT thresholds until 2030 and introducing IHT on inherited pensions. These changes highlight the importance of proactive estate planning to mitigate potential tax liabilities.
Another point to consider is the impact of rising property values on IHT liabilities. According to the Office for National Statistics, the average house price reached £286,000 as of September 2023, and more estates are exceeding the nil-rate bands. This trend underlines the need for careful planning to ensure your estate is not disproportionately taxed.
The importance of regular reviews
Drafting a tax-efficient will is not a one-off task. Life events such as marriage, divorce, the birth of children or grandchildren, or the acquisition of significant assets should prompt a review of your will. Similarly, changes in tax laws, like those announced in the recent budget, mean it’s wise to revisit your estate plan every few years.
Please update your will to avoid missed opportunities for tax savings or even legal disputes. For example, an outdated will might need to account for new reliefs or legislative changes, leading to avoidable tax liabilities.
Seeking professional advice
Given the frequent changes to tax laws and the complexity of IHT, professional advice is invaluable. A tailored estate plan considers your financial situation, family dynamics, and long-term goals to create a will that reflects your wishes while minimising tax liabilities. It’s not just about tax efficiency – it’s about peace of mind, knowing that your estate will be handled according to your intentions.
At HW Associates, we specialise in creating personalised, tax-efficient wills and comprehensive estate plans to help you preserve your wealth for future generations. Whether you’re looking to start your estate planning journey or update your existing will, we can help.
Get in touch to discuss how we can help you create a plan that works for you and your loved ones.