How To Write A Tax Efficient Will

Tax Efficient Will

Let’s start by observing that, in England and Wales, anyone can write a Will. You need to take proper, professional advice, if you have an estate of sufficient value that somebody, somewhere, might want to fight over, or challenge, when you’re gone

While English law doesn’t require any formal qualification to write a Will (how mad is that.?), the legal framework does place great importance on whether or not the Will is ‘valid’

Simplest of those requirements is that when you sign your completed Will, you need two witnesses with you, both signing at that same time as you, and neither can be ‘beneficiaries’

A ‘tax-efficient Will’ may assist in legally reducing the amount of Inheritance Tax that your family and loved ones have to pay when you pass assets and lifetime’s work to your children

Without a Will, the distribution of your assets will be subject to ‘Intestacy Rules

What’s the starting point for Inheritance Tax?

Writing a tax efficient will for inheritance tax purposes

Inheritance Tax is currently 40% ,and only applies to the excess value of your estate above the ‘nil rate band’ of £325,000. Married couples and civil partners each have nil rate band allowances of £325,000, meaning that Inheritance Tax only applies above £650,000

Further, if your main asset is your home, and you want to pass it your children, there’s an additional residential allowance of £175,000 for each spouse, which may mean there’s no Inheritance Tax liability on assets up to £1m

Those with assets of £2.35m or more will lose the benefit of the residential nil rate band, unless other exemptions apply

What can I do to improve my Inheritance Tax position?

Well, you can just spend your money, or give it away as a gift during your lifetime, survive for 7 years, and it’s outside of your estate for Inheritance Tax purpose. There’s plenty of anti-avoidance rules and other regulations to consider, and your circumstances could change in future, of course, so take care

You could release equity in your property to do that, or you could downsize, and give away some, or all, of the surplus. Again, survive for 7 years and the gift should be effective for Inheritance Tax purposes

If you don’t want to gives things away, what else can you do?

Check that your pension(s), death-in-service benefits and life insurance policy(ies) are in Trust. If they are in Trust, they won’t form part of your estate for Inheritance Tax purposes. If they’re not in Trust, they will form part of your estate for Inheritance Tax purposes and your children and loved ones could end up paying 40% to the taxman

Remember that your Individual Savings Account (ISA) that your financial middleman sold you, is very likely to be inside your Inheritance Taxable estate, which means that the shiny new valuation you got for, say, £1m is really only worth £600,000! You might want to check?!

Use all available ‘Allowances’ (such as pension contributions) and ‘Exemptions’. Importantly, Exemptions are outside of your estate immediately so make sure you use them all. Focus, in particular, on ‘Gifts out of Normal Expenditure’

This extract is taken directly from HMRCs own Manual: ‘there’s no limit to how much you can give tax-free’ as long as ‘you can afford the payments after meeting your usual living costs’

Consider establishing Trusts for your children. Maximise use of Relevant Property Trusts. Done properly, couples can gift up to £650,000. All you have to do is survive 7 years, then rinse and repeat! There are ‘anniversary’ and ‘ten-year charges’ to consider but, typically, those are far less than the Inheritance Tax savings (and those charges are easily, and legally, avoided anyway!)

If possible, maximise Business Property Relief and Agricultural Property Relief. You may be able to pass on your family trading business to your children free of Inheritance Tax. The same is not true of your family property investment business, where 40% will be confiscated by HMRC in death duties (unless you plan, with us, well in advance!)

HMRC allow ‘reasonable’ contributions to a less well known retirement scheme which is enabled by a UK Finance Act, and even has its own Statutory Instrument! There’s no tax relief available but, when properly constructed, the contributions are immediately outwith the scope of UK Inheritance Tax

How can a Will improve Inheritance Tax efficiency?

Your Will is a key part of your Inheritance Tax planning. Without it, your assets will be distributed according to the ‘Intestacy Rules’ we mentioned above and your children may be subject to Inheritance Tax unnecessarily

Which means that there’s 40% less for your family and loved ones, and all because you couldn’t be arsed to have your Will professionally written!

Maybe you need to think about that for a moment..

Here’s a real life case to focus your attention

We recently came across a case where Aled had done his own Will, with some help from his accountant(!). The document was properly executed, and was a valid Will

Several years later, Aled died and was succeeded by his wife, Rhonda. Aled left an Inheritance Taxable estate of £1.2m. As the Will was written, HMRC was due to confiscate 40% of everything. That’s £480,000 to the tax authority, and each of their 5 children was to receive just £144,000

When Rhonda and Aled started their lifetime’s mission to create a legacy for their family, they never envisioned that HMRC would be the biggest beneficiary of everything they worked for..

Making changes to your Will after you die

Deeply distressed, Rhonda asked their long time accountant and friend to double check their calculations. The numbers were signed-off as correct, along with the recommendation that ‘you’ll have to pay the Inheritance Tax’

Rhonda approached us for a second opinion and, fortunately, we were able to rescue the situation for her, and her family, by using a ‘Deed of Variation’. All of the beneficiaries agreed that Rhonda should be the beneficiary of Aled’s Will, in order to maximise their inter-spouse tax exemptions

The family Inheritance Tax bill was legally reduced from £480,000 to zero, just by combining a standard exemption, and some obvious hindsight planning, as permitted by English law

A few weeks later, Rhonda met with her financial middleman, and now has a portfolio of Alternative Investment Market (AIM) investments which, assuming she survives for two years, will be outside of her Inheritance Taxable estate

Which means that each of their children should receive £240,000 which is almost double what they would have received..

Nobody has a monopoly on good ideas – if you’re in any doubt, or need some help, or just a second opinion, then it’s FREE to Get in Touch

Rhonda did, and it saved her family £480,000. Just saying..

Most common reasons for doing nothing

Most common reasons for doing nothing

In our experience, lethargy and lack of drive to see things through, are the most common reasons. I wrote ‘reasons’, but they’re nothing more than excuses. It’s your call; your family or HMRC?

Another concern is ‘losing control’ which really translates to ‘I don’t trust my family to handle things as well as I can’. That may be true, and experience suggests it’s likely your fault!

No matter, there are plenty of ways to gift assets without losing control, and that’s  particularly true of shares in family businesses

Costs is another excuse. Well, this one’s easily dealt with! There are two costs to most everything in life; the cost of doing something, and the cost of doing nothing. So, as a rough guide, take the value of your lifetime’s work* and multiply that by 40%, and you arrive at the tax cost to your family of you doing nothing! Contrast that with a few £000 in professional fees. It’s a no-brainer, isn’t it?

I’ve been saving the daftest ‘reason’ until last. After many years of Inheritance Tax planning with clients, we still meet people who seem to believe that talking about their mortality may, in some undefinable way, hasten their demise

We’re happy to confirm that simply has not happened, to any client, in 30 years. Men are from earth, women are from earth, get over it..

How to get your Inheritance Tax planning sorted and keep it up to date

The UK has one of the most complex tax structures in the world, with around 18,000 pages of tax laws, and nearly 1,000 tax reliefs and allowances. You can’t know them all. That’s a job for our team of Chartered Tax Advisors (CTA’s)

At outset, we ask you to visualise the future you want for your family legacy then, with our help, work back to today, using informed choices. Our CTA’s provide you with your legacy planning strategy, and all the tools you need to realise your vision

Once your Inheritance Tax planning is finalised, and paid for, you may be invited to become a full member of our Resource Optimisation Program (ROP) where our CTA’s will continue to work with you to aim to maintain everything for you while you’re alive, and they’ll even handle probate for your beneficiaries when you die, if that’s what you want..

ROP provides you with 3 options: our CTA’s will implement, maintain and manage everything, or our CTA’s will work with your existing advisors, or you can do it all yourself. That’s ‘Done for you’, ‘Done with you’ or ‘Done by you’

Contact us HERE to talk to an expert, for FREE

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