Why it’s important to set out how Inheritance Tax (IHT) is split in your Will.
When making a Will, most people focus on who will receive their estate. However, not everyone considers how any Inheritance Tax (IHT) should be shared between their beneficiaries, especially where some are exempt from IHT and others are not.
This situation commonly arises if you leave your estate to a mixture of:
- Exempt beneficiaries, such as charities or a spouse/civil partner, and
- Non‑exempt beneficiaries, such as children, family members, or friends.
If your Will is not clear how IHT should be dealt with, it can lead to unexpected tax bills, unfair results, or even disputes between beneficiaries. The way that the IHT is allocated can make a big difference to the amount each person receives.
Why does this matter?
IHT is usually charged at 40% on the value of your estate above the available allowances. However, gifts to certain beneficiaries – such as a spouse or a charity – are exempt from IHT.
When your estate is shared between exempt and non‑exempt beneficiaries, the key question becomes: who should pay the tax?
If your Will doesn’t state how IHT should be dealt with, non‑exempt beneficiaries may end up receiving much less than you intended, or an exempt beneficiary (such as a charity or spouse) may have to contribute to an unexpected tax bill.
The default legal position
If your Will doesn’t contain clear tax instructions, the law says that an exempt beneficiary takes their gift tax‑free, and the tax is paid entirely from the non‑exempt beneficiary’s share.
This is the default position and can be very different from what some people expect or intend.
The alternative approach provides for the non‑exempt beneficiary’s share to be increased so that after paying tax they receive the same amount as the exempt beneficiary receives tax‑free.
This method can lead to more IHT being paid and is only used if the Will contains clear instructions requiring it.
What this means for you when writing your Will
If you are leaving your estate to a mixture of exempt and non‑exempt beneficiaries, you should think about:
- Who you want to bear the IHT.
The default position means non‑exempt beneficiaries pay all of it unless your Will says otherwise. - Whether you want beneficiaries to receive equal or proportionate amounts after tax.
If that is your intention, your Will needs special wording. - Avoiding unexpected outcomes.
For example, children inheriting alongside a charitable gift could end up receiving far less than expected unless care is taken with the Will drafting. - Ensuring your Will reflects your true wishes.
Professional advice and appropriate drafting can avoid confusion, disappointment, or disputes further down the line.
Final thoughts
If your Will includes both exempt and non‑exempt beneficiaries, it is important to decide how you want any IHT to be shared. If you do not give clear instructions, the default method may not reflect your wishes.
A brief conversation now can prevent confusion, unexpected tax liabilities, and potential disagreements in the future.
Ellisons’ Private Client team is here to help you put the right provisions in place and ensure your Will reflects your wishes clearly. Please get in touch today.
