Inheritance tax warning as Britons overlook 'most important step to considerably reduce' their final tax bill

Frozen tax-free allowances and rising house prices are largely to blame for the increase in inheritance tax paid by bereaved families.

The number of estates which pay the 40 per cent tax charge is set to rise from around 40,000 this year to almost 50,000 by 2027, according to the Office for Budget Responsibility.

With more and more families getting caught in the inheritance tax threshold, and possible changes to the levy after the month, an expert has explained a key step to reducing the bill for loved ones after they pass.

Stacey Love, tax and estate planning specialist at Canada Life told GB News: "For benefactors, writing a will is the most important step you can take to support your loved ones after you’re gone.

"Likewise, engaging with a financial adviser can be invaluable for estate planning in tax efficient ways."

A Will is a legal document that sets out an individual's wishes regarding the distribution of assets and wealth after death.

Having a Will can provide peace of mind that one's state will be distributed to those who they choose, and as they would like.

Without one, an individuals assets will be distributed according to intestacy rules and may be subject to IHT that could otherwise be avoided.

Over half of UK adults (51 per cent) have not written a Will, nor are they currently in the process of writing one, according to research from Canada Life. This includes 13 per cent of people who state they have no intention to write a Will in the future.

Although it may seem important to do so, Britons are warned missing this important step could cost them heavily in the future.

By writing a Will, families can help to minimise charges if they decide to leave their estate to a spouse or civil partner

Those who are married or in a civil partnership can take advantage of the ‘spousal exemption’ and leave theirr estate to them in the will. In doing so, regardless of the total amount or whether it exceeds the nil rate band – the full value will transfer free from inheritance tax.

When a spouse passes away, they will also benefit from a person's unused inheritance tax allowance. This means, they can pass up to £650,000 (potentially more) on to somebody else, completely tax-free.

Another way a Will can reduce the inheritance tax bill is if people use it to maximise their property allowance

By leaving the home to children (or grandchildren) in the will, families will be entitled to a ‘property allowance’ – also known as the residence nil rate band.

Essentially, these allowances increase one's personal nil rate band by £175,000 – and they'll be able to pass on an estate worth up to £500,000 – without paying a single penny of inheritance tax.

For a married couple – who choose to combine their allowance and leave their home to their children – this means passing on an estate of up to £1m free from IHT.

Lastly, leaving money for charity in the will has tax benefits two-fold.

Firstly, any money left to a UK-registered charity will not count towards the total taxable value of one's estate – and can be transferred, 100 per cent free from inheritance tax. This also applies if they leave a gift in their will for political parties or a local sports club.

Secondly, if someone leaves more than 10 per cent of their taxable estate (i.e. the amount above the nil rate band of £325,000), the tax rate applied to the rest of their estate will then fall – from 40 per cent to 36 per cent.

This may not seem like a lot, but it "can considerably reduce one's final tax bill".

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Love continued: “Finances aside, it is also a huge weight off your loved one’s shoulders too. It offers clarity and helps to prevent disputes and additional stress.

“Don’t be afraid of having an open conversation about your wishes with those you want to leave an inheritance to. A professional financial or legal adviser will also be invaluable for offering independent advice and guidance.

“Once you’ve completed your Will, don’t just sit back and forget about it. Talk to your family, let them know where it is being kept.

"Also make sure to review it every couple of years - family circumstances change over time, and you need to make sure your Will evolves too.”

More than one in five (22 per cent ) UK adults who have received or expect to receive an inheritance are delaying or plan to delay a major life event until they receive it, according to Canada Life’s latest research. This increases to 27 per cent of those aged 18-34.

Almost one in five (19 per cent) 18-34 year olds who have received or expect to receive an inheritance will use, or have already used funds to buy their first property. One in 10 (12 per cent ) UK adults are regifting to their children, grandchildren, or other family members, while 19% plan to use or have used the cash to invest for the future.

Love continued: “It’s not surprising that many people are putting big life decisions on hold until they receive an inheritance. Rising property prices and recent high interest rates means that the possibility of home ownership for many people without an inheritance or financial help is slim.

"With the cost of living having increased sharply over the past few years, it makes sense that other expensive life events will have been put on the back burner or been thrown out altogether as well.

“If you expect to receive an inheritance it’s worth considering all of your options, and perhaps engaging with a financial adviser, before making any big decisions.

"We know that over a quarter of people receive less inheritance than they thought they would, so it’s also important to have open conversations with your family so that you have the information you need to help plan for the future.