Inheritance tax: Savers urged to take advantage of Free Wills Month to ‘mitigate IHT’ fees | Personal Finance | Finance
Inheritance Tax (IHT) costs can be managed by effective use of Wills, which ensure assets are passed on to intended beneficiaries and no more tax is paid than necessary. Having a professional draw up a Will and ensure it’s valid can prove to be costly but throughout October, charities across the UK will be offering free will services to elderly savers.
Peter Hamilton, Head of Market Engagement at Zurich UK, urged those aged 55 and over to take advantage of these services as IHT can often cost families tens, or even hundreds of thousands of pounds.
Mr Hamilton warned while the Office of Tax Simplification is “looking at IHT”, the numbers of people paying it continues to grow. On top of covering IHT worries, there are many good reasons to write a Will, especially for those who want to ensure their dependents are provided for following a bereavement.
Mr Hamilton said: “There are several ways to mitigate IHT. From lifetime gifting to setting up trusts. However, for many, having the funds available to pay the tax via an insurance policy can be an important and helpful option.
“Having the funds available to pay the tax on death could avoid your loved ones having to sell the property or other illiquid assets at what might not be the most opportune time, simply to meet a tax liability. If the IHT liability is funded for, rather than reducing the value of the estate, both the executors and beneficiaries will be happy.
Mr Hamilton concluded by stressing the importance of keeping a Will updated: “Make sure you talk with your adviser and your family regularly to ensure that your Will planning is up to date and develops with your circumstances. This includes factoring in any changes to legislation.”
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How does Free Wills Month work?
This month, members of the public aged 55 and over can have the opportunity to have their Wills written or updated free of charge by using participating solicitors in locations across England, Northern Ireland and Wales. To get the ball rolling, people will need to contact one of the firms of solicitors taking part in a Free Wills Month campaign during October to request an appointment.
The solicitor will then help draw up a Will which accurately reflects the wishes of the individual or couple involved. Those who take up the offer “are under no obligation” to leave a gift to one of the Free Wills Month charities. However, doing so could be beneficial as if 10 percent of an estate’s total is left to a charity in a Will, the remaining IHT bill will reduce from 40 to 36 percent.
Families will need to act fast if they want to take advantage of this as appointments are limited and are allocated on a first come first served basis. Once all available appointments are booked in the campaign will close, which may occur before the end of October.
While many charities and/or solicitors are participating in the scheme, a number of well known names may prove to be particularly tempting for savers. Age UK, Mind and the National Trust are all taking part or promoting the scheme.
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It’s important to get it right
Seeking professional guidance for the creation of Wills is advisable as Sandro Forte, CEO at Forte Financial, warned “DIY Wills” are at a much higher risk of being invalid.
Mr Forte broke down what could go wrong: “If the will hasn’t been properly witnessed it would be deemed invalid. If any amendments to the Will have not been properly structured this too could invalidate it.
“If an individual wants another person to continue to live in their property after their death an incorrectly written DIY will often lead to these individuals being forced from their home.
“And remember – without adequate provision in a will any business assets, property abroad or other assets will be frozen or inherited by those other than the intended.”
Ambiguity and use of language are the main culprits of the problem according to Mr Forte’s analysis. He explained legal documents such as these “still use a fairly ‘old-fashioned’ language” and if a single incorrect (or modern) word is involved, it can alter what the creator intended.
Additionally, with rising cases of Will disputes emerging in the courts, families may want to make sure their Wills keep up with changing family dynamics. In May, data released by the Ministry of Justice showed disputes in the High Court over Wills continued to increase year on year.
Katherine Pyrmont, a Senior Associate at Kingsley Napley, noted “Modern family dynamics (primarily) arising from second marriages and step children and/or half brothers and sisters as well as increased house prices are likely the most obvious reasons for the upward curve.Estates are worth more and consequently considered worth fighting over, particularly when there is no love lost between the parties.”
When is IHT levied?
IHT is levied on the estate of someone who has died and is passing on their assets, so long as their total estate is valued over £325,000. A person’s estate consists of property, money, possessions and other forms of wealth.
Usually, there is no IHT to pay if the value of one’s estate is below the £325,000 threshold or if everything above that threshold is left to a spouse, civil partner, charity or a community amateur sports club. If a person gives away their home to their children or grandchildren, they can increase their threshold to £500,000.
The standard IHT rate is 40 percent but this is only charged on the parts of the estate valued above the threshold. So, for example, if a person’s estate is valued at £350,000, 40 percent will be charged on £25,000.
Usually, funds from the estate are used to cover the IHT bill and this is managed by the person managing the process. If a Will was created, this will be the “executor”.
While IHT is designed to only affect wealthy families, more people are being hit by the tax. HMRC confirmed between April and August, £2.7billion was paid to the Government through IHT. This was an increase of £700million when compared to the same period in 2021.
In response to these figures, Simon Dawson, the Chief Commercial Officer of Legacy Release, warned IHT will continue to increase over the coming years.
Mr Dawson explained while population growth and increased life expectancy are partially to blame for the increases, the Government’s decisions will have the largest impact on how many people pay up.
“Ultimately however the biggest driver has been political, with the freezing of both the nil rate band (NRB) and the residence nil rate band (RNRB) until 2026,” he said.
“What this effectively means given [certain] economic trends, is that IHT receipts will continue to increase incrementally until at least 2026 without an explicit rise in the rate of taxation. This is because more and more estates have a growing value and as such will exceed the now capped relief provided by the NRB (£325,000) and RNRB (£175,000), with increasing frequency and scale.”