Making a change in a will can reduce the tax bill

Mrs T lives in the midlands with her husband who is nearly 90 and in poor health. Mrs T's sister-in-law is not very well either and is 90 years old. The sister-in-law has left £30,000 to her brother in her will but, should he die before her, "the inheritance goes to me", explains our reader.

"As her sister-in-law I would have to pay quite a lot of tax. My means are quite adequate. May I refuse the bequest in favour of my six adult children?"

The tax-free threshold between sisters-in-law, up to the last Budget, was £12,370 (this will go up slightly for the next tax year), because they are rated as "strangers". Mrs T could expect to pay at least £4,289 in Capital Acquisition Tax. (The first £12,370 is exempt; the next £10,000 is taxed at 20 per cent and the balance at 30 per cent.)

However, if our reader has ever been the beneficiary of a previous bequest, say, from a parent, aunt or uncle, the entire amount could be taxable.

In that case, Mrs T would certainly be better off inheriting this bequest as part of her husband's estate, which is entirely tax free between spouses.

The tax-free threshold between brothers and sisters was £24,470 before the Budget and so long as Mr T has never inherited before, his tax bill would be just £1,106.

According to the tax department at accountants O'Hare & Associates, who advise us on these matters, "Your reader cannot disclaim any inheritance in favour of her children in order to avoid CAT. The best solution would be for her sister-in-law to change her will, either now or upon the death of her brother, in favour of her nieces and nephews.

In that case, there would be no CAT liability since £30,000, equally distributed to six beneficiaries would result in bequests of just £5,000 each, which is well below the amount at which tax is payable - £24,470.

The tax-free threshold between an aunt and niece or nephew is the same as that between brothers and sisters. Once again, this assumes that the children have never received any other inheritances.

Finally, anyone who is thinking about leaving money to someone in their will, but is concerned about the tax bill they may face, should consider making them a gift of the money while still alive.

Gift tax is payable only at 75 per cent of the CAT rate, though once again, thresholds may not apply if the beneficiary has received an inheritance or gift in the past.