Wills and Inheritance Tax​

This article's designed to help you:

• Understand the importance of making a will.
• Avoid the pitfalls and common mistakes when leaving your money & property to others.
• Clear up the tax situation when making a will so only the right amount goes to HMRC.

We all want to leave a little something behind us for our loved ones, family friends or (providing they behave themselves) our children. The trouble is, it's all too easy to leave those closest to us a lot more than just our money and possessions. If you don't make a properly written will, you could be setting them up with serious headaches and missed opportunities too. With a little forethought and a basic understanding of the inheritance rules, though, you can decide exactly what to pass on when you pass on. Here's a simple guide to wills and Inheritance Tax.

Making a will

Writing a will can be complicated and time consuming. That said, unless something very weird happens, dividing up your property after your death is something you'll probably only have the chance to do once. That means it's worth getting it right. There are a few basic steps to follow to make your will.

• Get your estate valued

Obviously enough, you'll need to know what you're leaving behind you in order to divide it all up. Your list should include things like any properties you own, any savings and investments you have, your household contents and any other valuables. Remember that any unpaid debts you've run up will count against the value of your estate, so factor in things like loans, outstanding credit card balances and overdrafts. Usually, this sort of overall valuation is something you'll want to get done professionally.

• Decide where it's all going

Depending on your circumstances, this might be the easiest or hardest part of the job. In addition to family members and other typical beneficiaries, now's the time to make up your mind about leaving something to charities or other organisations. Remember that there may be funeral bills to pay as well, along with the various administration fees and tax.

• Pick your executors

This is less sinister than it sounds. An executor is simply someone who'll deal with all the admin of making sure your estate actually gets to the people you want it to. It can be a big job, so make sure you choose someone who can handle it and doesn't mind the work.

• Write your will

You've got a few options as to how you go about this. Talking to a lawyer's usually a smart decision, as long as they're properly registered with a recognised authority like the Law Society. Some banks and charities have services to help put your will together, too. Where are even specialist will writers, although you should check that they're members of the Institute of Professional Willwriters before going with them. As a last resort, you could have a crack at writing your will yourself—but we'll go over why that might not be such a brilliant idea a bit further down.

Making sure your will is valid

There are a few legal hoops to jump through to make sure your will's bullet-proof and watertight. It has to be in writing, for one thing. A spoken will doesn't carry a lot of weight, for instance. It also needs to be signed by you and witnessed by two other people to be valid. These witnesses really do have to be there when you sign the will, too. You can't just post someone a copy to sign later, for instance. Finally, while this might seem obvious enough, you need to be writing your will voluntarily, and while you have the 'mental capacity' to understand the effect it'll have on you, your possessions and your beneficiaries. Basically, no one can force or pressure you to sign a will you don't agree with, and it won't be valid if you didn't know exactly what you were doing when you signed it.

Will stats: did you know?

In the UK, most of us would rather die before talking with our friends or loved ones about money—and a lot of us end up doing just that. There are 31 million people in the country who don't have wills at all. That figure includes 85% of all people under 35. Even those who've done their homework haven't necessarily finished the job, though. Wills aren't set in stone the moment they're signed. You've got to keep them updated as your circumstances change over the years—something that 60% of us haven't bothered with.

Overall, there are 5.4 million adults in the UK who don't even know how to get started writing their wills. Even so, as a nation of DIY fanatics and have-a-go heroes, it's probably no surprise that so many of us decide to try writing them anyway. In fact, about 7 in 10 of us say we'd be prepared to give it a go if it meant bringing down the costs. The trouble is, that last statistic alone is the cause of many of the problems people run into, seeing them ending up on the phone to a professional after all to fix the problems.

The dangers of wills

It's tough to overstate how important it is to get the details right when you're writing a will, and not everyone realises what they're letting themselves in for when they go the DIY route to save some cash. Technically, a home-made – or even handwritten – will has some legal weight behind it. However, simply listing out what you’ve got and who’ll get it won’t help much when people start squabbling over the details. DIY wills are often vague, ambiguous or simply out of date. You can’t leave your home to your child if you’ve already sold it, for instance. Did you intend to leave your new house to them instead? Tricky things like that can quickly become a legal nightmare.

Then there's your funeral to think about, which a lot of people understandably forget. After all, who wants to waste time and money arranging a party they're not invited to? Lumping funeral costs onto grieving relatives is probably something to avoid, so a well written will usually contains provisions for that.

What if you die while your kids are still kids? This is probably the single most important decision you'll have to make—but again, it's something DIY willwriters often miss out. The last thing you'll want is to lose your say in how your children are looked after by forgetting to include those details in your will paperwork

Inheritance tax

When your estate gets divided up after your death, it'll count as taxable income in HMRC's eyes for the people it goes to. This is one of the reasons why it's so important to keep your will up to date. The threshold for paying Inheritance Tax is pretty high, but it's always a smart move to understand the full value of what you're passing on and adjusting your will as needed.

The standard rate for Inheritance Tax is 40%, but your beneficiaries won’t automatically have to pay it from the first penny they inherit. In fact, the tax doesn’t kick in at all unless the total value of the estate's at least £325,000 – and even then, it only applies to the portion of it that’s above that £325,000 threshold.

If you're married or in a civil partnership, leaving everything above the £325,000 threshold to your spouse or partner will mean there's no Inheritance Tax to pay. The same goes for anything you leave to charities or, weirdly, community amateur sports clubs.

Read our guide: Inheritance Tax vs Capital Gains

Giving Gifts: What are the rules?

A lot of people try to bring down the amount of Inheritance Tax their beneficiaries will have to pay by giving out their possessions as gifts while still among the living. That's actually not a bad move, but the taxman's pretty wise to this sort of thing, so it may not pay off as well as you'd hoped. The people you're giving your gifts to might still end up paying some Inheritance Tax on them if the possessions were given out in the 7 years before you ended up dying, for instance. The deciding factors include:

• The relationship between you and the person you gave the gift to.
• When the gift was given.
• The gift's value at the time.

As for what counts as a gift, the definitions are actually pretty broad. Depending on your estate, your gifts might include:

• Properties or land.
• Stocks and shares (including unlisted shares if you held them for under 2 years before your death).
• Personal possessions and household goods (like furniture, jewellery and so on).
• Good, old fashioned cash.

You can read more about how Inheritance Tax works in our other guide, "The Difference between Inheritance Tax and Capital Gains Tax". In the meantime, keep checking back here for more money tips and updates. We’re experts at saving you cash and we’re always here to help. That’s the reason why you’re better off with RIFT.