Tax Reasons for Making a Will

After looking at the importance of having a will and questions to ask yourself about making one, we now look at the tax benefits.

There are a lot of misconceptions about wills and inheritance tax (IHT). Generally speaking, IHT at 40% is payable on your estate in excess of the so-called ‘nil rate band’ (£325,000 in tax year 2012/2013) if it passes to persons other than your UK domiciled spouse (or an exempt person such as a charity). It does not matter whether you leave a Will or not, just who inherits.

The transferable nil rate band provisions were introduced in October 2007.  This means that if you leave a Will under which all your estate passes to your widow(er), as long as he/she is domiciled in the UK, there will be no IHT on your death. When he/she dies, not only will his/her own nil rate band be available to set against the value of the estate to determine any IHT liability but also the proportion of the nil rate band that you did not use on the first death. Thus, if you did not use any of your nil rate band the personal representatives of your surviving spouse/civil partner will be able to claim two nil rate bands.

If you die intestate, your widow(er)’s legacy is limited to the specified amount (currently less than the nil rate band) with the rest passing to your children or your other relatives.

Before 9 October 2007, this could also have resulted in some of your nil rate band being ‘lost’. However, any unused portion of the nil rate band on first death can now be claimed by the surviving spouse’s personal representatives – see below.

Transferable nil rate band (TNRB)

The Pre-Budget Report of 9 October 2007 introduced, with immediate effect, a provision whereby any nil rate band unused by the first spouse or civil partner to die can be claimed by the estate of the survivor.  The unused amount is determined as a percentage of the nil rate band that applies on the survivor’s death.  Thus, even if the first spouse/civil partner leaves all of his/her estate to the survivor, their nil rate band is not lost.

For example, Sheila dies on 1 November 2012. Her husband, Bill, died on 1 July 1998 and left his entire estate to Sheila (i.e. he used none of his nil rate band). Sheila’s executors can claim a 100% increase in her nil rate band i.e. from £325,000 to £650,000. If Bill had left assets valued at 50% of his then nil rate band to his children and the rest of his estate to Sheila, Sheila’s executors can claim a 50% increase in the nil rate band, i.e. from £325,000 to £487,500.

Key points about wills for married couples and Registered Civil Partners (RCPs)

In most cases each of the couple would want the survivor to have access to all (or most) of their assets. However, until October 2007, by passing all assets to the spouse on the first death would have resulted in the loss of the nil rate band and potentially an additional tax liability on the death of survivor of up to £120,000 (being 40% of the then nil rate band of £300,000).

Following the introduction of the transferable nil rate band on 9 October 2007, any unused proportion of nil rate band on first death can be claimed by the estate of the surviving spouse/RCP. Thus, the nil rate band is not ‘lost’ and so the tax reason for using a nil rate band trust no longer exists.  However, for many individuals there will be other reasons for still using nil rate band trusts in their will – for example if:

• there is a desire to protect the assets of the surviving spouse from a claim from the local authority if he/she goes into care
• one of the spouses had a former spouse who died and he/she has a transferable nil rate band from that former spouse.  Here it is only possible to pass on a maximum of one extra nil rate band on death and so a nil rate band will trust would be appropriate for that person to use all available nil rate bands on his/her death (ie pass one on to the ‘new’ spouse and use one with the trust).
• the spouse who dies first wishes to keep control over who eventually benefits from his/her assets (eg because this is a second marriage and the deceased wants children from the first marriage to benefit).

What else could be impacted by having a will?

Have you thought about what would happen to your holiday home if you die intestate? Read our next post which covers this and other practical reasons to make a will.