Passing on wealth

The guides listed here provide information on why you should write a will and keep it up to date, and an explanation of current inheritance tax rules. Our calculator will help you estimate your estate’s liability to inheritance tax.

Wills and intestacy

A will gives you the freedom to decide how you want to pass on your assets. It can be essential in providing for your dependants and is a useful tool in inheritance tax planning.

If you die without a will – known as ‘intestate’ – your estate is distributed according to intestacy law. This means you will have no control over who gets what.

How an estate is distributed without a will in England and Wales

The rules changed on 1 October 2014:
Married couples and civil partners with children – your spouse will inherit the first £250,000 (this includes all personal possessions).
Anything above £250,000 is divided in 2 with the spouse getting life interest on 50% and the rest split between the children when they are 18.

Married couples and civil partners without children – the surviving spouse inherits 100% of the estate.
These rules apply if you are separated but not if you are divorced.

Unmarried couples with children – a surviving partner has no automatic right to inherit if their partner dies without a will. If they have children, the children will receive all of the estate when they are 18.

Single people – or those who are unmarried – without children have their estates distributed to surviving relatives in the following order:
1. Parents
2. Brothers are sisters
3. Grandparents
4. Aunts and uncles
If there are no living relatives, the whole estate will pass to the crown.

How an estate is distributed without a will in Scotland

In Scottish law, if you die without making a Will the following procedure applies once debts and other liabilities have been met:

1. Prior rights are settled first

A surviving spouse or civil partner has certain rights over the deceased person’s heritable and moveable estate.

Heritable property means land and buildings.

Moveable property includes money, shares, cars, furniture and jewellery.

A surviving spouse or civil partner is entitled to:

the dwelling house of the deceased in which he or she was living at the time of the deceased’s death, up to a value of £473,000, or this amount if the house is worth more than £473,000
up to £29,000 worth of any furnishings and furniture of that house
the first £50,000 cash of the estate if the deceased left children or descendants of children
the first £89,000 cash if the deceased left no children or descendants.

Prior rights are a first claim on the estate.

2. Legal rights are dealt with next

Once prior rights are settled, the legal rights to the deceased person’s ‘moveable’ estate are dealt with.

The surviving spouse or civil partner is entitled to:

a third of the deceased’s moveable estate if the deceased left children or descendants of children
half of the moveable estate if the deceased left no children or descendants.

The children are collectively entitled to:

a third of the deceased’s moveable estate if the deceased left a spouse or civil partner
half of the moveable estate if the deceased left no spouse or civil partner.

Each child has an equal claim. Where a deceased child would have had a claim had they not died before their parent, their descendants may claim their share by ‘representation’.

3. The remainder devolves according to relationship

After prior rights and legal rights have been satisfied, the remainder of the estate devolves in the following order:

Children take the whole
Either or both parents and brothers and sisters – half to parent or parents and half to brothers and sisters
Brothers and sisters take the whole
Either or both parents take the whole
Husband or wife or civil partner – surviving spouse or civil partner takes the whole
Uncles or aunts (on either parent’s side) take the whole
Grandparent or grandparents (on either side) take the whole
Brothers and sisters of any grandparents (on either side) take the whole
Ancestors of intestate remoter than grandparents, on both paternal and maternal sides generation by generation successively take the whole, but if no ancestors survive in any generation their brothers and sisters come before ancestors of the next more remote generation
Finally, the Crown takes the whole

Three general rules apply to this order of succession:

There is no preference for males, or in regard to age
The children of any deceased relative who would have been entitled to the whole or any part of the intestate estate can take equally among them the share which their deceased parent would have received
Brothers and sisters or ancestors of the deceased, whether of full blood or half blood, are entitled to succeed but those of the full blood have preference.

This information is based on our understanding of current legislation, which may change in the future. The FCA does not regulate certain tax planning activities and services, will writing or advice on charitable giving.

Inheritance tax

Inheritance tax (IHT) is a tax that is levied on your estate when you die and pass your estate to your beneficiaries.

It is calculated by working out the value of your entire world-wide assets*, and then levying tax as follows (for 2017/18):

up to £325,000: no IHT
above £325,000: 40%
reduced rate: 36%**

*IHT is levied on the global assets of UK domiciled individuals.

**A reduced rate of 36% applies to estates for which 10% or more of the total value of the estate is given to charity.

Example – an estate of £425,000 pays £40,000 tax (the first £325,000 has no tax liability, the next £100,000 pays tax at 40%, hence total tax = £40,000).

An additional nil-rate band was introduced from 2017/18 when a residence is passed on death to direct descendants. This band starts at £100,000 per person (for 2017/18) but will gradually increase each tax year until it reaches £175,000 by 2020/21.

Your estate includes all of your property, investments and homes (wherever in the world they are located). It also includes business assets such as farms (where you are the owner occupier or tenant), unincorporated businesses, unlisted or AIM listed companies. However, tax reliefs may apply to some of your estate, as explained below.

Businesses
Business property relief may apply on a business asset if it has been held for two years and, where applicable, agricultural property relief will also apply. These types of relief are complex and if you class yourself as a business person, entrepreneur or landlord you should have a full analysis carried out.

Warning – if you are in business with significant business assets it might well be true that you have little current liability. However, you need to look forward and consider the position when you have retired. Will you be passing the assets on to the next generation (so they won’t be yours when you die), or are you more likely to sell them? If the latter, then when you do die then your estate will be subject to IHT, and you should consider planning for that outcome.

Spouses and civil partners
Currently, most transfers of property between spouses or civil partners are exempt from IHT. This means that when one partner dies leaving some or all of their property to their spouse/civil partner they may not make full use of their own £325,000 nil-rate band.

However, it is possible to transfer unused nil-rate band allowances between spouses or civil partners. The rules apply to allow a claim to be made to transfer any unused IHT nil-rate band on a person’s death from the estate of their deceased spouse/civil partner.

The amount of the nil rate-band potentially available for transfer will be based on the proportion of the nil-rate band unused when the first spouse or civil partner died. If on the first death the chargeable estate is £150,000 and the nil-rate band was £300,000, then 50% of the original nil-rate band is unused. If the nil rate band when the surviving spouse dies is £325,000, then that would be increased by 50% to £487,500.

Any claims for transfer of unused nil-rate band amounts can be made by the personal representatives of the estate of the second spouse or civil partner when they make an IHT return. The rules apply to all surviving spouse/civil partner estates, including those when the death of the first spouse/civil partner occurred prior to that date.

First Death before 18th March 1986
If the first death happened prior to 18 March 1986, seek advice as tax rules were different then and the availability of any NRB will depend on the details of the tax treatment of the estate at that time.

The most common inheritance tax mitigation idea that doesn’t work
Giving something away but keeping it really. This comes in many guises, the most common being to try to give your house to your children while being allowed to live in it until you die, giving a valuable work of art to your children but actually keeping it on your wall, or putting money into a trust where it is possible for you to get it back out.

All of these ideas fall foul of the ‘gift with reservation’ rule. Broadly speaking, this means that a gift is not a gift if the donor retains any actual or potential benefit from the gift, i.e. the house as a home, appreciating the art, the ability to access the money.

Large estates
These need to be looked at with great care. In essence, the practical approach will be some or all of:

Giving assets away while alive, be it to trusts, charities, friends or family. In short you can give away as much as you like to whomsoever you wish and, if you live seven years after the last major gift, all inheritance tax on those gifted assets will be avoided. That said, in disposing of assets by gift there may be immediate capital gains tax implications. Also, trusts need to be treated with much more care than most people think (use the wrong one and its internal tax rate may negate any apparent inheritance tax savings, or inflexible deeds may prevent you disposing of your assets as you wish). Advice and planning is essential.
Providing for the anticipated tax liability by means of life insurance. The liability is estimated (net of any will and gift-based planning) and a life insurance policy is taken out that pays out the amount needed for tax. This is paid into trust and so falls outside the estate. This is most widely used where the estate comprises large assets whose sale or breakup is to be avoided so that they can be passed intact down the generations (typically a family property, art, antiques etc).

If you have an estate for which inheritance tax may be an issue it is important to seek advice and plan in advance. We will be able to assist you in this.

This information is based on our understanding of current tax law and practice, which may change in the future. The way in which tax charges, reliefs and allowances are applied depends upon individual circumstances and may also be subject to change in the future.

This document is solely for information purposes and nothing in this document is intended to constitute tax advice. You should take professional advice before making any tax planning decisions.

The FCA does not regulate certain tax planning activities and services, will writing or advice on charitable giving.

Inheritance tax

Inheritance tax (IHT) is a tax that is levied on your estate when you die and pass your estate to your beneficiaries.

It is calculated by working out the value of your entire world-wide assets*, and then levying tax as follows (for 2017/18):

up to £325,000: no IHT
above £325,000: 40%
reduced rate: 36%**