8th February 2023
general
Many people put off thinking about estate planning. It can be a difficult topic, particularly if you have a large estate or a complex family situation.
But a strong estate plan has a number of benefits:
Here are our 6 tips for a strong estate plan:
1. Make a Will
Your will is the foundation of your estate plan. Writing your will is straightforward and inexpensive - avoiding the complications of intestacy can be well worth the cost.
The intestacy rules vary throughout the UK, but they generally aim to distribute assets between your spouse or civil partner and children. If you are not married and do not have children, your other relatives would benefit in a fixed order of priority. If you have no other relatives, your estate passes to the Crown.
The rules of intestacy can be problematic for several reasons. For example:
The rules of intestacy will not suit the majority of families, particularly if there are unmarried partners, second marriages and step-children to consider.
It is important to revisit your Will when your circumstances change, particularly if you get married or divorced.
2. Plan Ahead
A financial plan can help to form the basis of your estate strategy. This means considering some important questions, for example:
Most gifts remain within your estate for seven years, so if you are in a financially secure position, it can be worth making gifts early. Of course, this is a balancing act, as there is a risk of running out of money if you give away too much too early. A financial plan can help you decide how much to give away and when.
3. Use Exemptions and Reliefs
A strong estate plan makes use of legitimate reliefs and exemptions to reduce IHT. The main reliefs are outlined below:
Nil rate bands
Every individual has a nil rate band of £325,000, which is the amount that can be passed on free of Inheritance Tax. Couples jointly have a nil rate band of £650,000.
Where the estate includes a main residence, a residence nil rate band of up to £175,000 (£350,000 for a couple passing on a jointly owned property) may be available, providing the property is passed to a direct descendant. The conditions for claiming the relief are explained here.
Gifts
Certain gifts fall outside your estate for Inheritance Tax purposes. Gifts of up to £3,000 per donor, per year, are immediately exempt. This allowance can be carried forward by up to one tax year if it is not used.
There are other exemptions for special occasions or gifts out of income. The full list can be found here.
Business Assets
Your estate may qualify for Business Relief if you own certain eligible assets. This may include shares in an unlisted company or assets (including property) which are used for the purposes of trade.
Certain investment vehicles such as shares listed on the AIM market or Enterprise Investment schemes can also qualify, although these are very high risk.
4. Set up a Trust
A trust allows you to specify how assets are distributed amongst your beneficiaries. Trusts can be set up during your lifetime with a gift, or via your will. You can also set up life insurance policies in trust so that any benefits are paid outside your estate.
There are a number of different trust structures, all with different features, benefits and tax consequences.
It is worth seeking financial and legal advice to determine the best solution for you.
5. Make Gifts to Charity
Gifts to charities, political parties or for national benefit are immediately outside your estate for inheritance tax purposes.
But you can also make charitable gifts via your Will. If you designate at least 10% of your estate to charity, your inheritance tax bill will also reduce from 40% to 36%.
For example, if you have an estate of £1 million, after deduction of the nil rate band, the IHT liability will be £270,000, leaving £730,000 for your beneficiaries.
However, if you leave £100,000 to a charity, the IHT bill is reduced to £207,000, leaving £693,000 for your beneficiaries (£793,000 if we include the charity). The donation of £100,000 only ‘costs’ the estate £36,000 in terms of the net inheritance.
Designating part of your estate to charity is a simple way of ensuring that more of your money is passed on as you wish rather than being collected in taxes.
6. Don’t Forget Your Pension
Pensions are not included within your estate, and can be passed on free of tax on death before age 75.
After 75, pension death benefits are taxed as income in the hands of the beneficiary. The beneficiary can then decide whether to draw on the pot depending on their own circumstances and tax position. For example, if they are a higher rate taxpayer and do not need the money, they may decide to preserve the pot for their own beneficiaries.
It can be efficient to defer drawing on your pension for as long as possible and use other assets (which are within your estate) to fund your retirement income instead.
Estate planning can be complicated, particularly if you have a large estate. It’s worth seeking advice to ensure you are fully aware of the opportunities for tax planning as well as the risks.
Please don’t hesitate to contact a member of the team if you would like to find out more about estate planning.
