Are Gifts in a Will Subject to Inheritance Tax?

When someone dies, their executors calculate the value of the whole estate and work out whether inheritance tax is due, taking into account the nil rate band, residence nil rate band, and any exemptions such as gifts to a spouse or charity. Inheritance tax is generally a liability of the estate as a whole, paid by the executors before the remaining assets are distributed to beneficiaries, rather than a tax charged separately on each individual gift.

This means a beneficiary who receives a specific gift under a will, for example a sum of money or a particular item, does not usually need to pay inheritance tax personally; the tax is already accounted for by the executors out of the estate before distribution, unless the will says otherwise.

Certain gifts made in a will are exempt from inheritance tax regardless of value, most importantly gifts to a spouse or civil partner and gifts to registered charities. These exempt gifts reduce the value of the estate that is actually subject to tax, which is why the structure of a will, who receives what, has a direct effect on the final bill even though the total estate value stays the same.

Gifts to most other beneficiaries, including adult children, other relatives and friends, do not attract any special exemption and form part of the taxable estate in the ordinary way.

A will can leave specific gifts, sums of money or particular items to named people, as well as a residuary gift, everything left over once specific gifts, debts and expenses have been dealt with. How a will is worded can affect who effectively bears the burden of any tax, unless the will says the tax should be paid from the residue, which is the default position for most gifts under general law and the wording of most well-drafted wills.

If a will is silent or unclear about which part of the estate should bear tax on a particular gift, this can create confusion or even disputes between beneficiaries, which is one reason it helps to have wills drafted clearly and, where the estate is significant, reviewed by a professional.

Gifts made in a will only take effect on death and are assessed as part of the estate at that point. This is different from lifetime gifts, which are governed by the seven-year rule: gifts made more than seven years before death generally fall outside the estate for inheritance tax purposes, while gifts made within seven years may still be taxed, sometimes at a reduced rate through taper relief depending on how long before death they were made.

People sometimes confuse these two systems, but they are separate. A will cannot achieve the tax benefits of lifetime giving because, by definition, it only takes effect after death.

Whether you are leaving specific gifts to family and friends or planning charitable giving, it helps to have a will that clearly sets out your wishes and how any tax should be dealt with. My Posh Will is an online guided will service for England and Wales, with a single will costing £69 and mirror wills costing £89, both one-off payments with lifetime access.

If your estate is large, if you are considering lifetime gifting as well as gifts in your will, or if you want to structure a charitable gift to secure the reduced tax rate, use our suitability check, as a solicitor or tax adviser can help make sure the detail is right.