Rising property values are leading to more families having to pay inheritance tax (IHT), according to the latest figures from HM Revenue and Customs.

In the tax year 2021 to 2022, there were 27,800 taxpaying IHT estates, an increase of 800 (3%) since the previous tax year.

It meant that families paid a total of £5.99 billion in tax.

It’s thought the number of estates caught in the IHT net is likely to rise significantly over the next few years as property values continue to increase.

This will clearly be a concern for many families in the UK, but careful planning through making a will can significantly reduce the burden.

Without a will, the intestacy rules dictate how your estate is divided, which can be less tax-efficient and may leave your loved ones with a larger tax bill than necessary.

Understanding Inheritance Tax

Inheritance tax is currently set at 40% on estates worth more than £325,000, the basic threshold. However, this threshold can be increased to £500,000 if you pass your home to your children or grandchildren, thanks to the residence nil-rate band (RNRB).

Couples can combine their allowances, meaning that married couples and civil partners can pass on up to £1 million before IHT applies. Any amount above these thresholds is subject to the 40% tax.

Making a Will to Maximise Tax Efficiency

One of the key benefits of making a will is the ability to manage your estate in a way that maximises the use of available allowances and reliefs. Without a will, your estate may be distributed inefficiently, potentially resulting in a higher IHT bill.

1. Making Use of Spousal Exemptions

Anything left to a spouse or civil partner is exempt from IHT. When you make a will, you can ensure that your assets are left to your surviving spouse, enabling them to inherit without triggering tax liability.

Additionally, when your spouse dies, they can combine their unused IHT allowance with your own, further reducing the potential tax on your estate.

If you die intestate (without a will), this exemption still applies, but you lose the ability to control how other parts of your estate are distributed.

2. Gifting During Your Lifetime

A well-structured will can help reduce your estate’s value for IHT purposes by allowing you to make tax-efficient gifts. You can give away up to £3,000 each tax year without it counting towards your IHT threshold.

Larger gifts may be subject to the “seven-year rule,” meaning they are only exempt from IHT if you survive for seven years after making the gift. Including plans for lifetime gifting in your will allows for a more systematic reduction of your estate’s taxable value.

3. Using Trusts

Wills can be used to set up trusts, which are useful tools in inheritance tax planning.

For instance, discretionary trusts can allow assets to be passed on to beneficiaries in a way that delays or mitigates the impact of IHT. By placing assets into a trust, you remove them from your estate for IHT purposes. Trusts also provide flexibility, enabling you to control when and how your beneficiaries receive their inheritance.

4. Charitable Donations

Leaving part of your estate to charity is another way to reduce IHT. Donations to registered UK charities are exempt from inheritance tax, and if you leave at least 10% of your estate to charity, the IHT rate on the rest of your estate is reduced from 40% to 36%.

A will allows you to specify charitable donations, ensuring you benefit from this tax relief.

Making a will is essential not just for ensuring that your wishes are followed, but also for reducing the inheritance tax burden on your family.

Through careful planning, you can make full use of allowances, exemptions, and reliefs, helping to protect your estate and pass on as much as possible to your loved ones.

Please contact us if you would like advice about making a will and estate planning to provide tax savings for your family.