3 admin hacks to cut tax when you die

If you’re not already in old age you probably haven’t given much thought to what will happen to your money if you die.

You might not think you’ll have a tax problem, or a complicated estate that will be a burden for loved ones to deal with. However, anyone with a few years of working and contributing to a pension, or a life insurance policy to protect their family if the worst happens, could find they have set an admin trap in the event of their death - and possibly a hefty tax bill to.

Here’s are some simple admin hacks you can use today to limit that risk. Note: what follows is not comprehensive estate planning - anyone who this they will have a significant inheritance tax liability should consider taking professional financial advice. Our advisers might be able to help.

• Read more - Inheritance Tax: how it works

Make a will

A will is a legal instruction for how your wealth should be distributed if you die. The simplest reason to make one is that it allows you to choose what happens to your money. The danger is that, without a will, your estate will be subject to the rules of ‘intestacy’ - a legal term for those who die without leaving instructions for how their wealth should be distributed.

Dying ‘intestate’ means that the law will determine the distribution of your assets, considering various factors such as your marital status, the number of children you have and the size of your estate. The law prioritizes immediate family members first and then extends to other relatives in a specific order, and the rules are complicated.

In England and Wales, a spouse or civil partner will inherit everything up to the value of £322,000, and then half of everything above that. Children are entitled to half the amount above £322,000. If the deceased was not married or in a civil partnership, the estate will be split equally among their children. If a child has passed away, their share will be passed on to their children.

If there are no children, the estate will be divided equally between the deceased's parents. If there is no spouse, civil partner, children, or parents, the estate will be split equally among any brothers and sisters. If no surviving relatives are found, the entire estate will go to the Crown.

The government has a tool to help you work out what might happen in your circumstances.

Clearly, there’s a fair chance that these rules won’t align with your personal preference for how you want your money distributed. That alone is reason enough to make a will. But there are practical and, potentially, tax reasons to do it as well.

For example, if you are married or civil partnered you can pass on any amount of wealth to your spouse or partner without inheritance tax (IHT) applying. Individuals can also pass on any unused ‘nil-rate band’ for IHT to their spouse - this is the amount of wealth individuals can pass onto to beneficiaries (other than their spouse) with IHT applying. The rules can make it advantageous for spouses to leave everything to each other in their will, before the second, surviving, spouse then uses the combined nil-rate band to pass onto their beneficiaries.

If the first spouse dies intestate, however, then only £322,000 will be passed to a spouse before other beneficiaries inherit - potentially creating a tax bill.

It is possible to make a will within a few minutes if you want - although you may prefer to take a little longer over this task if your affairs are more complex. Many companies and charities offer free will writing services - particularly for the two ‘Make a will’ months each year, the next of which is October 2025.

Protecting your pension - Expression of wish

Money in your pension is not treated the same as your other assets when you die. The administrators of your pension have to decide who to pay your pension money to after your death, basing the decision on your instructions. ‘Expression of wish’ is how you make those instructions.

• Read more on Expression of Wish

In practice, this is usually a case of filling out a form that can be obtained from the company administering your pension. You’ll be asked to name the individuals you want your money to go to.

Like writing a will, the benefit of making your expression of wish is that you control where the money goes. But there can be admin and tax advantages as well.

Firstly, it should make the process of distributing your pension money quicker and more straightforward in the event of your death - your loved ones will be very grateful for that if the worst happens. With no expression of wish in place - or if it is out of date - pension administrators may require extra details before they agree to distribute pension money.

Secondly, it may give your beneficiaries extra flexibility to control how they take the pension money - be it as a lump sum or as income.

This can be important because, without an expression of wish, your pension administrator may require the money be distributed as a lump sum, with tax payable at your beneficiary’s marginal rate of income tax.

Note - the treatment of pension savings for the purposes of inheritance tax is changing.

• Read more on inheriting a pension

Life assurance - put it in trust

Insurance policies that pay out if you die represent potentially very large sums of money for your surviving loved ones in the event of your death. Once paid, this money will usually fall within your estate, and therefore within the scope of inheritance tax.

One way to combat that is by writing your life assurance policy ‘in trust’. This means setting up a legal arrangement where the proceeds of a life insurance policy are managed by trustees on behalf of the beneficiaries. This means that when the policyholder passes away, the payout is distributed according to the terms of the trust, rather than being part of the deceased's estate.

There can be other benefits as well. Trusts generally allow for quicker distribution of funds to beneficiaries. This can be crucial for covering immediate expenses following the policyholder's death. Assets within a trust are usually protected from creditors, meaning that the proceeds from your life insurance policy can be safeguarded for your beneficiaries.

It may sound complicated but, in practice, the companies offering life assurance policies will often offer a straightforward way to write policies in trust.

More on passing on wealth

Important information -investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.