When life goes on

Time to read: 10 minutes

Death is not something we Brits find easy to talk about. We don’t even like to think about it. Perhaps this is why 51% of British adults have no will in place.1   But by avoiding the subject, we make life much harder for our loved ones after we die. Here’s how to grasp the nettle and plan for a future when you’re no longer here – and that includes knowing a thing or two about inheritance tax.

Making a will is not a task that many people look forward to. It can easily slip down the to-do list – for a number of reasons. For a start, we’re often uncomfortable with the subject of our own mortality. Maybe we don’t think we’re old enough yet to need a will. Maybe we don’t think we own enough to warrant one.

The fact is, nobody knows when their time is going to be up. And whether you’ll leave behind a little or a lot, it can be a real comfort to put your affairs in order – knowing that when your time comes, you’ll have eased the burden on your family.

Why you should make a will

Protecting those we care about is something that we do naturally during our lifetime. Putting a will in place is a way to carry on protecting them after we’re gone.

But there’s much more to it than that. Here are our top 6 reasons for making a will:

  1. You get to decide exactly how and when your estate will be distributed – that is, who gets what share of your property, money and possessions.
  2. You can save your family the additional distress of having to deal with uncertainty at what is already an emotional and difficult time.
  3. If you have underage children, you can appoint someone to be their legal guardian to look after them until they are 18 and ensure there are funds to help.
  4. You get to choose who will be your executors – the people in charge of organising your estate after you’ve gone.
  5. You can make clear whether you’d like to be buried or cremated and any other wishes you may have for your funeral.

You may even be able to use a will to reduce the amount of inheritance tax payable on the property and money you leave behind.

What happens if you die without a will?

If you’ve not got around to making a will yet, chances are you’re not aware of the consequences of not having a will. If so, please keep reading – you might find this section an eye-opener.

If you were to die without a will in place, your estate would be shared out according to certain rules, known as ‘intestacy rules’. This basically means the law decides who should deal with your affairs and who gets to inherit what. It also means that your things could end up going to someone other than who you intended.

While the rules vary across England, Scotland, Wales and Northern Ireland, these broad principles apply throughout the UK:

  • If you’ve a cohabiting partner but are not married or in a civil partnership, they are not legally entitled to anything. Contrary to what many people think, being a so-called ‘common-law’ partner doesn’t give you any legal rights.
  • If you’re married or in a civil partnership, your partner might get everything and your children nothing – or your partner might not get everything when you think they will
  • If you’ve children or grandchildren, how much they are legally entitled to will vary depending on where you live in the UK.
  • If you’ve no spouse, civil partner or children, your estate would go to your parents – or your siblings if your parents have died
  • If you have no close living relatives, it would go to HM Treasury on behalf of the Crown

The only way to sure your wishes are met after you die is to create a legally-binding will. This is true for everyone but is especially important if you have people who depend on you financially or if you want to leave things to people outside your family.

Making a will's easier than you might think

The first thing you need to do is draw up a list of all your assets and valuable possessions so you can decide how you’d like to divide them up. As well as any property, savings, investments or pensions, remember to consider things like cars, furniture, jewellery and any antiques.

Think about who you want to benefit from your will and whether you’d like to leave any special possessions to particular people. If you have young beneficiaries, think about what age you’d like them to inherit. It’s also worth considering what you’d like to happen if any of your beneficiaries were to die before you.

When it comes to actually writing your will, you can do it a number of ways.

Via a solicitor – It’s usually best to get advice from a specialist solicitor or other regulated professional who knows wills, probate and inheritance laws inside and out. This is usually the most expensive option but if you have complex needs – and especially if you’re unmarried, previously bereaved or a business owner – it can give you peace of mind.

Via a will-writing service – This is usually a cheaper option than using a solicitor and could be suitable if you have needs that are fairly straightforward. Remember that will writers are not normally regulated so look for someone who’s a member of a professional organisation.

Writing it yourself – The cheapest way to write a will is usually the riskiest. You can use either an online DIY service or a template bought from a shop but this should only be considered if you have very simple wishes, such as everything to your spouse. If you do choose to go down this route, make sure you follow the rules carefully for getting it witnessed and signed otherwise it won’t be valid.

However you decide to write a will, the important thing is to do it now while you’re thinking about it. Don’t risk letting the years slide by. And just focus on the feel-good factor of getting this task off your to-do list once and for all.

Getting to grips with inheritance tax

OK, so we’ve hopefully now convinced you to write or revisit your will.

While we’re on the ghoulish yet serious subject of what happens after you die, here’s another related and equally important topic that we need to broach – tax.

Inheritance tax, or IHT, is a tax that will be applied to your estate when you die if it’s valued over a certain amount. Remember, when we talk about your estate, we mean your property, money, investments and possessions.

If you’re not careful, inheritance tax could take a sizeable chunk out of your estate, leaving less for your loved ones. However, with some planning and forethought, it’s possible to reduce the amount owed – and perhaps even pay none at all. The main thing is to be prepared. Work out if you’re going to be liable and if so, what you can do to reduce your liability.

The good news is there’s normally no tax to be paid if:

  • The value of your estate is below the inheritance tax threshold of £325,000 or
  • You decide to leave everything to your spouse or civil partner – or to a charity

And thanks to the recently introduced ‘family home allowance’, if you leave your home to your children or grandchildren, (including step-, adopted or foster children), your tax-free threshold could go up to £450,000 – rising to a maximum of £500,000 by April 2020.

Plus, if you’re married or in a civil partnership and you don’t use your entire tax-free threshold when you die, the unused portion can be added to your partner’s threshold. This means the total threshold for a married couple or civil partners could currently be as much as £900,000 – rising to £1m by April 2020.

Please bear in mind that the value of any tax benefits described will depend on your individual circumstances. And inheritance tax rules could change in the future. To find out more about inheritance tax, go to GOV.UK

Is your estate liable for inheritance tax?

Chances are, your estate is worth more than you think. Thanks to rocketing house prices and booming stock markets, more and more individuals’ estates are becoming liable for inheritance tax. In the 2017-18 tax year, UK families paid more than £5 billion in death duties – the highest figures on record and £400 million more than the previous year.

To work out if you have an inheritance tax liability, this is how to value your estate:

  • list all your assets (as well as money in the bank include property, shares, your share of any jointly-owned assets, plus your possessions such as jewellery, cars or antiques)
  • work out their current value
  • deduct any debts and liabilities

If the total value of your estate exceeds your tax-free threshold, then the amount that sits above the threshold will be liable for tax at a rate of 40%.

For example, if your estate is worth £550,000 and your tax-free threshold is £450,000, there will be an inheritance tax bill of £40,000 to be paid (that’s 40% of £100,000).

Ways to cut your inheritance tax bill

The first thing to know is this not as simple as just giving it away. Any money given away before you die usually counts as part of your estate and is subject to inheritance tax if you die within 7 years of making the gift. Therefore, it’s important that you start early when planning for how you want to pass on your wealth.

The rules that govern ways of legally cutting your estate’s inheritance tax bill are complicated. However, as a general guide, here are a few of the ways in which you may be able to reduce your liability:

  • Leave money to charity. Normally no tax is due on charitable donations. If you leave at least 10% or more of your estate, you could reduce the rate of inheritance tax due on some assets from 40% to 36%.
  • Give away up to £3,000 a year in gifts. The first £3,000 given away each tax year is not subject to inheritance tax when you die. And if you don't give away £3,000 in one year, you can carry that allowance forward and give away £6,000 in the next tax year.
  • Make regular gifts out of surplus income. Inheritance tax applies to your assets. However, if you regularly give money from your income, such as your pension or earning, it’s exempt providing it leaves you enough income to maintain your lifestyle.
  • Put your assets into a trust during your lifetime. This can prevent young heirs from getting their hands on cash before you think they’re ready, and remove property and investments from your estate for inheritance tax purposes providing you live for another 7 years. It could even provide you with an income stream or allow you access to your original investment.
  • Pay into a pension instead of a savings account. Most pensions don’t count as part of your estate for tax purposes. And if you’ve got a defined contribution pension, you can nominate anyone – your children, grandchildren or even friends – to inherit your remaining fund. Check whether your pension plan allows you to pass on your savings in this way, as final salary pensions and annuities can’t usually be transferred to anyone other than your spouse. 

If in doubt, ask a professional

Because estate and tax planning is complicated and much will depend on your individual circumstances, it’s well worth getting advice to help you make the right decisions for your situation.

If you have over £50,000 in savings and investments, we could offer you wide-ranging financial advice on many aspects of your financial life – from protecting your family to passing on your wealth. Please note, fees apply.

Or if you’d like to seek a specialist estate and tax planning adviser in your area, you can use the Money Advice Service’s Retirement Adviser Directory  and select ‘Inheritance tax planning’ to refine the search results.

Whatever you do, don’t put it off

Planning for what you want to happen after you die is an important task that could save your family many thousands of pounds and potentially a lot of extra grief and heartache.

Whatever age you are, if you've got a house, savings or a business and people who depend on you or that you'd like to look after, you seriously need to make a will.

And if you’re in your 50s or 60s, now’s the time to start planning how to lessen the burden of any inheritance tax liability on those you’ll leave behind.

It may not be the cheeriest of tasks but taking action today could make the world of difference to your family’s future – and who knows, even their families’ families’ futures.

 1 Source: Will Aid 'More than half of British adults have no will, survey reveals' September 2017

2 Source: The Telegraph, 'Inheritance tax haul hits a record  £5.2bn' April 2018

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