Tax & Accounting News

The tax benefits of having a will

19/04/2010

Around two in three people who die in England and Wales die intestate, i.e. without having made a will. Not only does this mean their assets may not be divided up as they wish, but it could also bring about an additional Inheritance Tax (IHT) cost.

This is because the ‘rules on intestacy’ give specific directions on how an estate should be distributed, which may not be in line with the deceased’s wishes. They state that the first £250,000 goes to the individual’s spouse, with half of what’s left put into trust for the spouse and half going into a trust for any children. Where there is no spouse or children, the estate goes to other relations in a set order.

The potential problem with Inheritance Tax arises because gifts between spouses are exempt from IHT. Anyone who passes their property to their spouse when they die also passes on their IHT exemption of £325,000, so when the second partner subsequently dies, they can leave up to £650,000 to their children tax-free.

However, had the partner in that situation died intestate with assets worth £650,000, only £250,000 would have gone to their partner, with the remaining £400,000 divided equally between the spouse and the children. In other words, they would be liable to IHT on £200,000 of their estate unnecessarily.

Making a will is therefore the best way to use the spousal exemption of IHT. Making a will also allows the use of other tax-free exemptions, such as unlimited provision for school fees and maintenance for children under the age of 18, or those in full-time education.

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