As the main IHT liability is likely to arise on death, an efficient and up to date Will is important. There are other strong, non-tax reasons for making a Will. A Will should enable your estate to be unlocked quickly and handled by someone you trust. Furthermore, if you die without a Will, the intestacy provisions will apply and may result in your estate being distributed in a way you would not have chosen.
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The chosen distribution of an estate will vary enormously and depend upon the individual’s particular circumstances. However, some general points can be made.
If you are married then you are likely to want to leave much of your wealth to your spouse free of IHT. However, assuming that you have children, you should consider leaving £255,000 to them so that your nil rate band is used and an IHT saving of £102,000 (being £255,000 x 40%) is secured. Where it is not desirable or practical to leave £255,000 directly to your children you may consider a trust instead. Indeed there is a way of leaving all of your wealth to your spouse which still enables use of the nil rate band. Such an arrangement is referred to as a debt-charge arrangement or a Loan Plan Will. In essence the plan works by leaving everything to the surviving spouse but in addition leaving £255,000, typically in the form of a charge on the house, to a discretionary trust. On the death of the first spouse there is no IHT liability. On the death of the surviving spouse, his or her estate is reduced by the £255,000 owed to the trust.
If you are single then the position is rather different. You have your nil rate band available and possibly some other IHT exemptions and reliefs but if your estate is worth more than £255,000 there is likely to be an IHT liability on death whoever you choose to leave it to. Therefore consider the feasibility of giving away wealth during your lifetime which, so long as you survive for at least seven years from the gift, will be IHT-free. You may want to consider a term assurance policy to protect against death within the seven-year period. If you are single but part of a ‘permanent’ couple then a Will is essential because the intestacy provisions provide nothing at all for an unmarried partner.
Even where a Will does not distribute the estate in the most tax efficient way, all may not be lost. In the two-year period following a death, the terms of a Will can be varied using a Deed of Variation. However, the use of this should be viewed as a backstop. Trying to agree on a revised distribution of an estate can often lead to serious family arguments!