Estate planning

What is estate planning?

Estate planning is about arranging how you are going to pass on your wealth to future generations or charitable causes in the smoothest and most tax-efficient ways. It’s important to make plans as early as possible in life so that you don’t leave your family with an unexpected inheritance tax (IHT) bill.

It’s a process that enables you to create a clear plan detailing how you would like to gift money to your family and distribute your property and possessions to your loved ones while you’re still alive and after you die. The best plans also include making a will, stating funeral arrangements, naming powers of attorney and could also involve setting up a trust.

Estate planning can help to manage the IHT liabilities on your assets and ensure you maximise the value of the estate that will pass to your family. A carefully thought-through plan makes what can be a difficult time less stressful for your loved ones, who will be dealing with your financial affairs after your death.

Planning what you’ll do with your money and assets is a process you can start early. The main advantage is that it gives you the widest range of possible solutions. You’ll be in a stronger position with the knowledge and tools to help you pass on your wealth with confidence.

At a glance:

-    It’s important to make plans for passing on your money and assets before you die so your estate doesn’t pay more tax than is necessary.

-    When making financial plans for later life, write a detailed will to avoid intestacy and consider putting in place a property and financial affairs lasting power of attorney.

-    Estate planning can be complex, which is why it’s important to work with a professional financial adviser to identify what’s best for you and your family.

What is inheritance tax?

Inheritance tax (IHT) is a charge on your estate (including savings, investments, property and possessions) after you have died. You can work out the total value of your estate by adding together all your assets that are liable for IHT and subtracting any debts and other liabilities.

IHT is calculated as a 40% charge after you die that applies to the amount by which your estate exceeds the nil-rate band (NRB), which is currently £325,000.

Your estate does not need to pay IHT if:

The total value of the estate is less than £325,000 (or £650,000 for a married couple).

You leave everything over £325,000 to your spouse, civil partner or charity.

If you leave your main residence to your children or other direct descendants then your estate can benefit from the Residence Nil Rate Band (RNRB), which is an additional £175,000 per person or £350,000 for a couple. That means a couple could leave £1 million without any IHT liability.

If your estate is worth more than £2 million when you die, the RNRB becomes less generous, and tapers at a rate of £1 for every £2 over this threshold.

Exemptions and reliefs to inheritance tax

By making the most of the various gifting reliefs and exemptions you’re entitled to, it’s possible to reduce the amount of IHT your family will have to pay. It’s a good idea to take advantage of gifting money as you can:

Annual gift allowance

Making gifts while you’re alive is a one way to reduce the value of your estate for IHT purposes and benefit your loved ones immediately. You can give away assets or cash worth up to £3,000 each tax year with no IHT liability regardless of the total value of your estate when you die. You can roll over any unused allowance to the next tax year. However, the unused allowance can only roll over into the next tax year, it does not accumulate over multiple tax years. Therefore, the maximum you can gift using this allowance in any one tax year is £6,000.

Gifts to others

Gifts out of surplus income

You can give away any amount of money without it being subject to IHT, if it comes out of income and not capital, and it does not affect your quality of life. For example, if you gift out of income, but you then must dip into capital to meet your normal living expenses, this exemption won’t apply. The key to using this exemption is that you need to keep accurate records of your gifts, income and expenditure.

Wedding or civil partnership gift

Business Relief

Previously known as Business Property Relief, Business Relief (BR) enables individuals to reduce or eliminate the IHT due on certain business assets. Investments in unquoted companies or smaller companies quoted on the Alternative Investment Market (AIM) attract IHT relief at 100%. For your estate to qualify for BR, you must have owned the shares for at least two years before you die.

Pension arrangements

Other exemptions from IHT

When planning the most tax-efficient ways to pass on wealth, it’s important to know that if you are married or in a civil partnership, you can leave your entire estate to your surviving spouse tax-free when you die. Please bear in mind that wills are voided by marriage so you will need to review your wishes upon marriage or if your personal situation changes.

In addition, leaving money to a charity is free from IHT and could cut the overall tax rate on the remaining amount in your estate. If you leave 10% of your net estate to charity, the IHT rate drops to 36% (instead of 40%) on the balance.

How can an estate planning adviser help?

An adviser specialising in estate planning can help you consider how the latest laws and regulations around IHT affect you. They will also be able to explain how any changes in your family situation need to be reflected in your estate’s financial plans.

This approach can help you to maintain the right balance between gifting money and retaining control, so you’ll be financially secure in later life. Working now to organise and plan for how your assets are passed on could reduce the IHT bill for your beneficiaries after your death.

What happens if you don't plan your estate?

If you don’t make plans for your estate, then your money and assets may not be distributed in the way you want. Failing to think ahead doesn’t just affect your wealth but also the people and things you care about.

Estate planning is important because it can help reduce the IHT liabilities on your assets and minimise potential legal complications. If you don’t make financial plans for your estate, it could mean your family are faced with an unexpected IHT bill.

By making your estate plans now, your decisions will be carried out and affairs settled in an orderly way. A will can help ensure your assets are distributed according to your wishes, it allows you to nominate an executor who will ensure any specific wishes are carried out, something intestacy rules don’t cover.

If you don’t have an estate plan that includes a lasting power of attorney, and you lose the capacity to make decisions for yourself, it could cause legal complications for your spouse or family members. This can often cause delays and potential issues in accessing joint bank accounts or making healthcare decisions.

Tax advantages of estate planning

A well-prepared and executed estate plan ensures the correct assets go to the right people at the right time, in a tax-effective manner that could lower the tax burden on your family.

Calculating IHT can be confusing, and the potential for making an expensive mistake is high, which is where your adviser can help. By drawing out what’s important to you, a financial adviser for estate planning can help you clarify what you want to achieve.

IHT planning is best approached as a continuous process. It’s important to review your plan regularly to make sure it’s appropriate for you and reflects any changes in your family, as well as the latest laws and regulations around IHT.

After considering the implications of any decisions, an expert can help make sure your beneficiaries aren’t left with unexpected tax bills when it’s time for them to receive their inheritance.

Estate financial planning process

Estate planning solutions involve looking at your assets and then organising and structuring them in a way that’s best for you and your family. Whatever the size of your estate, it’s important to make sure all your affairs are in order.

There are some straightforward steps you can take now to help take some of the stress out of the estate planning process:

Write a clear will

Having an up-to-date will with clear instructions on what you want to happen with your money and assets when you pass away is probably one of the most important things you can do for yourself and your family. What’s often less understood is how your estate will be passed on if you don’t make a will.

Dying without one may unintentionally disinherit those closest to you, such as stepchildren or unmarried partners. When someone dies without a will, their estate is divided up according to intestacy law.

This can make the process of sorting out the estate complicated as it is the law that decides who inherits the estate. The rules will allocate your estate to family members in strict order of priority, depending on the family circumstances.

Note that there are different rules of intestacy for England and Wales, Scotland and Northern Ireland.

Create a lasting power of attorney

A lasting power of attorney (LPA) is a document that lets you appoint one or more people to make legal decisions on your behalf if you lose mental capacity – whether through illness or by accident.

Putting in place an LPA can give you peace of mind that someone you trust oversees your affairs. However, many people don’t think of getting one until they get older or become ill, which can be too late.

Not having an LPA in place can cause extra concern, expense and stress for your family and your own wishes about your finances or health may not be taken into consideration.

If you do not have an LPA in place:

• You have no say in who the court appoints as your deputy.

• You have no say in the scope of power granted to your deputy.

• A deputy’s application could be refused, so the council may be appointed instead.

• Your family will have to pay extra to apply for and maintain a deputyship.

• You may not be able to sell jointly held assets until the court appoints a deputy.

Set up a trust

Your estate plans may benefit from a trust, which is a legal way of arranging some of your assets for the benefit of others, without giving them full control. Trusts allow you to control the gifts you make via a third party (the trustee), who acts as an intermediary between you and the beneficiaries. You can appoint yourself as the trustee so you can retain control over how the funds are spent.

Setting up a trust and then transferring some of your assets into this structure for the benefit of your children or grandchildren can be an efficient tool when it comes to reducing the IHT liability on your assets.

There are several different types of trusts, depending on what you want it to achieve, ranging from bare trusts to charitable and discretionary trusts, to non-resident trusts.

An estate planning financial adviser can help you decide which trust works best for your needs and can arrange for the correct legal experts to draw up the arrangements and terms of the structure.

The rules around trusts are complex so it’s important to speak to an expert in estate planning before you go ahead.

Estate planning advice

Whatever your circumstances, when it comes to estate planning advice, a financial planner can guide you through the issues that matter most and put in place arrangements to help achieve your goals.

They can also work with you to make sure the appropriate legal structures are arranged to deal with matters after your death and ensure nothing is left to chance.

A professional estate planning adviser can ease the burden of dealing with your estate at what is a difficult time for your family by helping with the following services:

Helping your family to understand the process and timelines for completion
Gathering information
Preparing tax forms and applying for the Grant of Probate (Confirmation in Scotland)
Closing accounts
Completing the legal work
Selling and transferring assets and paying debts
Selling and gifting property
Finalising tax work
Producing estate accounts

There’s a lot to consider when passing on money and assets. By seeking estate planning services, you can identify what’s best for you and your family. These early conversations often uncover issues you may not have thought about before.

If you’re thinking about how estate planning and IHT will affect you and your loved ones, our financial planners will assess your financial situation, consider what you’d like to achieve and help explore your options. At every stage, we’ll work with you to balance gifting money and keeping control of enough to maintain a comfortable lifestyle.

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Estate PLanning