Category: Protection

Planning your finances in advance should help you ensure that when you die, everything you own goes where you want it to. Making a Will is the first step in ensuring that your estate is shared out exactly as you want it to be.

If you don’t make a Will, there are rules for sharing out your estate called the ‘Law of Intestacy’, which could mean your money going to family members who may not need it, with your unmarried partner or a partner with whom you are not in a registered civil partnership receiving nothing at all.

If you leave everything to your spouse or registered civil partner, there’ll be no Inheritance Tax to pay because they are classed as an exempt beneficiary. Or you may decide to use your tax-free allowance to give some of your estate to someone else, or to a family trust.

Good reasons to make a Will
A Will sets out who is to benefit from your property and possessions (your estate) after your death. There are many good reasons to make a Will:

– you can decide how your assets are shared – if you don’t have a will, the law says who gets what

– if you’re an unmarried couple (whether or not it’s a same-sex relationship), you can make sure your partner is provided for

– if you’re divorced, you can decide whether to leave anything to your former partner

– you can make sure you don’t pay more Inheritance Tax
than necessary

Before you write a Will, it’s a good idea to think about what you want included in it.

You should consider:

– how much money and what property and possessions
you have

– who you want to benefit from your Will

– who should look after any children under 18 years of age

– who is going to sort out your estate and carry out your
wishes after your death, your executor

Passing on your estate
An executor is the person responsible for passing on your estate. You can appoint an executor by naming them in your Will. The courts can also appoint other people to be responsible for doing this job.

Once you’ve made your Will, it is important to keep it in a safe place and tell your executor, close friend or relative where it is.

It is advisable to review your Will every five years and after any major change in your life, such as getting separated, married or divorced, having a child, or moving house. Any change must be by codicil (an addition, amendment or supplement to a Will) or by making a new Will.

Scottish law on inheritance differs from English law.

There are some important exemptions that allow you to legally pass your estate on to others, both before and after your death, without it being subject to Inheritance Tax.

Exempt beneficiaries
You can give things away to certain people and organisations without having to pay any Inheritance Tax. These gifts, which are exempt whether you make them during your lifetime or in your Will, include gifts to:

– your husband, wife or registered civil partner, even if you’re legally separated (but not if
you’ve divorced or the registered civil partnership has dissolved), as long as you both have a permanent home in the UK

– UK charities and political parties – not only is the gift itself exempt, but if you gift more than 10% of your taxable estate to charity, the rate of Inheritance Tax on the rest of the estate is reduced to 36%

– some national institutions, including national museums, universities and the National Trust

Your need to bear in mind that gifts to your unmarried partner or a partner with whom you’ve not formed a registered civil partnership aren’t exempt.

Exempt gifts
Some gifts are exempt from Inheritance Tax because of the type of gift or the reason for making it. These include:

Wedding gifts/civil partnership ceremony gifts
Wedding or registered civil partnership ceremony gifts (to either of the couple) are exempt from Inheritance Tax up to certain amounts:

– parents can each give £5,000

– grandparents and other relatives can each give £2,500

– anyone else can give £1,000

You have to make the gift on or shortly before the date of the wedding or civil partnership ceremony. If it is called off and you still make the gift, this exemption won’t apply.

Small gifts
You can make small gifts, up to the value of £250, to as many people as you like in any one tax
year (6 April to the following 5 April) without them being liable for Inheritance Tax.

But you can’t give a larger sum – £500, for example – and claim exemption for the first £250. And you can’t use this exemption with any other exemption when giving to the same person. In other words, you can’t combine a ‘small gifts exemption’ with a ‘wedding/registered civil partnership ceremony gift exemption’ and give one of your children £5,250 when they get married or form a registered civil partnership.

Annual exemption
You can give away £3,000 in each tax year without paying Inheritance Tax. You can carry forward all or any part of the £3,000 exemption you don’t use to the next year, but no further. This means you could give away up to £6,000 in any one year if you hadn’t used any of your exemption from the year before.

You can’t use your annual exemption and your small gifts exemption together to give someone £3,250. But you can use your annual exemption with any other exemption, such as the wedding/registered civil partnership ceremony gift exemption. So, if one of your children marries or forms a civil partnership, you can give them £5,000 under the wedding/registered civil partnership gift exemption and £3,000 under the annual exemption – a total of £8,000.

Gifts that are part of your normal expenditure
Any gifts you make out of your after-tax income (but not your capital) are exempt from Inheritance Tax if they’re part of your regular expenditure. This includes:

– monthly or other regular payments to someone, including gifts for Christmas, birthdays or wedding/civil partnership anniversaries

– regular premiums on a life insurance policy (for you or someone else)

It’s a good idea to keep a record of your after-tax income and your normal expenditure, including gifts you make regularly. This will show that the gifts are regular and that you have enough income to cover them and your usual day-to-day expenditure without having to draw on your capital.

Maintenance gifts
You can also make Inheritance Tax–free maintenance payments to:

– your husband or wife

– your ex-spouse or former registered civil partner

– relatives who are dependent on you because of old age or infirmity

– your children (including adopted children and stepchildren) who are under 18 or in full-time education

Potentially exempt transfers
If you, as an individual, make a gift and it isn’t covered by an exemption, it is known as a potentially exempt transfer (PET). A PET is only free of Inheritance Tax if you live for seven years after you make the gift.

Gifts that count as a PET are gifts that you, as an individual, make to:

– another individual

– a trust for someone who is disabled

– a bereaved minor’s trust where, as the beneficiary of an Interest In Possession (IIP) trust (with an immediate entitlement following the death of the person who set up the trust), you decide to give up the right to receive anything from that trust or that right comes to an end for any other reason during your lifetime

Only outright gifts count as PETs
If you make a gift with strings attached (technically known as a gift with reservation of benefit), it will still count as part of your estate, no matter how long you live after making it. For example, if you give your house to your children and carry on living there without paying them a full commercial rent, the value of your house will still be liable for Inheritance Tax.

In some circumstances, a gift with strings attached might give rise to an Income Tax charge on the donor based on the value of the benefit they retain. In this case the donor can choose whether to pay the Income Tax or have the gift treated as a gift with reservation.