Planning for the inevitable is a process that many put off, avoid or fail to tackle in time. However, the last thing that you want to do when you work hard all your life is to find a substantial part of your estate and assets in the hands of HMRC.
Inheritance tax is often called a voluntary tax in that, with planning the payment of inheritance tax can be avoided. IHT is levied on a person’s estate when they die, and certain gifts made during an individual’s lifetime.
Much estate planning involves making lifetime transfers to utilise exemptions and reliefs or to benefit from a lower rate of tax on lifetime transfers.
We share some important considerations to make below:
Draw up a will
Drawing up a will ensures that your estate passes to the beneficiaries in a tax-efficient manner and that your assets are directed as you see fit.
It’s important to make sure that your arrangements are as flexible as possible in order to be able to alter them in the future, should the need to arise:
- In your personal or financial circumstances
- in, or the addition of, beneficiaries
- In legislation or HMRC practice
Some people wait until death to transfer their wealth to loved ones, but it can be beneficial to both parties to do this while you are still alive. Each year you can give away £3000 without it being subject to Inheritance Tax (IHT). You can also give £250 to any number of people each year.
Pensions are one of the most tax-efficient ways to pass on your wealth and assets to your beneficiaries. If you pass away before the age of 75, benefits left in a money purchase pension can be paid as a lump sum or drawdown income to any beneficiary, with absolutely no tax to pay. After the age of 75, they will be taxed at the beneficiaries’ marginal income tax rate.
A trust can help to reduce a IHT bill and give you control over how your assets are used by future generations. Trusts can help you to:
- Keep a lump sum outside of your survivor’s estate to ensure it is not subject to IHT.
- Protect your children or grandchildren’s legacy if your surviving spouse remarries
- Protect your children/grandchildren’s legacy from their own marital disputes
- Avoid giving children or grandchildren a sum of money that they may not spend as wisely as you would like.
It’s important to remember that if you die within seven years of making a transfer into a Trust, your estate will have to pay IHT at the full amount of 40%.
Find out more about our trust services
Life insurance can be used to either meet or reduce a prospective IHT bill. You can set up a whole-of-life assurance policy, which lasts for as long as you live. As long as the policy is written in trust, the proceeds of the life insurance policy will not be included in your estate. When you die the policy pays out to the trust which pays all or part of the inheritance tax bill.
Most couples own their homes on a joint mortgage. You can pass a home to your husband, wife or civil partner when you die and there will be no IHT to pay if you do this. However, if you leave the home to another person in your will, this will count towards the value of the estate.
If you are philanthropically minded, it’s important to remember that any gifts to charity are IHT free. Also, the rate of IHT applied to estates on death is reduced where at least 10% of the estate is left to charity. In such cases, the rate of IHT applied reduces from 40% to 36%.
Find out more about our Philanthropy & charitable giving services
If you own your own business, you need to consider what will happen to it after retirement or if you are no longer around. It’s important to have a succession plan for your business, which could be included in your retirement plan.