Inheritance Tax and Wills Explained

When someone dies, their executors add up the value of everything they owned, savings, property, investments and personal possessions, and deduct any debts and reasonable funeral costs. The result is the value of the estate. Tax is charged at 40% on the value above the available tax-free thresholds, known as the nil rate band and, where a home is involved, the residence nil rate band.

Not everything in an estate is taxed in the same way. Gifts left to a spouse or civil partner, and gifts left to registered charities, are usually exempt entirely, regardless of value. This is why the structure of a will, not just the total size of an estate, has such a direct effect on the eventual tax bill.

Every individual has a nil rate band, currently £325,000, which is the amount that can be passed on before inheritance tax applies. If the whole nil rate band is unused on the first death in a marriage or civil partnership, typically because everything passed to the surviving spouse under the spouse exemption, the unused percentage can usually be transferred and added to the survivor's own nil rate band when they later die.

There is also a residence nil rate band, currently up to £175,000, which applies when a home is left to children, grandchildren or other direct descendants. Like the main nil rate band, it can often be transferred between spouses and civil partners. The residence nil rate band tapers away for larger estates, reducing by £1 for every £2 that the estate exceeds a set threshold, so very large estates may not benefit from it at all. These figures change from time to time, so check the current amounts on GOV.UK before relying on them.

A well-drafted will can help make the most of the exemptions and allowances available, for example by leaving assets to a spouse to benefit from the spouse exemption, or by structuring a charitable gift to qualify for a reduced rate of tax. It can also record which nil rate band and residence nil rate band claims should be made after the first death in a couple.

What a will cannot do is retrospectively reduce the value of an estate or invent exemptions that do not exist. Inheritance tax planning that goes beyond simple exemptions, such as lifetime gifting strategies, trusts, or business and agricultural relief, needs to be considered separately and well in advance, usually with a solicitor or tax adviser.

For many estates, a clear will that makes sensible use of the spouse exemption and the nil rate bands is all that is needed. But estates involving business assets, farmland, overseas property, trusts, or substantial lifetime gifts raise questions that go beyond what a standard will can address, and getting the detail wrong can be costly.

If your estate is likely to face an inheritance tax bill, or if you are considering lifetime gifts, trusts, or you hold business or agricultural property, it is worth speaking to a solicitor or a qualified tax adviser who can look at your full circumstances.

Inheritance tax rules and thresholds are reviewed and can change, and your own circumstances, marriage, house purchase, a new child, a change in the value of your estate, can also affect what your will should say. It is worth reviewing your will every few years, and always after a major life event, to make sure it still reflects both your wishes and the current tax position.

My Posh Will is an online guided will service for England and Wales that lets you record your wishes clearly, including gifts to a spouse or charity. A single will costs £69 and mirror wills for couples cost £89, both one-off payments with lifetime access. For anything beyond straightforward estate planning, use our suitability check to see whether you need advice from a solicitor or tax adviser first.