Benjamin Franklin is quoted as saying “in this world, nothing is certain, except death and taxes”. When it comes to Inheritance Tax, or IHT as it is sometimes known, and you have enough money, the two certainties go hand-in-hand.
Our clients frequently tell us that they want to know more about IHT. It’s not surprising that this is the case as it is a complicated topic, and because, naturally, most people don’t want to pay tax on their money when they die, considering they have paid tax on it for most of their lives!
IHT planning is a topic we advise on often, however for the purposes of this blog we will mostly reference Estate Planning, as there is more to it all than just minimising the amount of tax you pay when you die, which is what IHT is mainly concerned with.
Estate Planning is a broad topic, so we’ll keep it brief here and offer our top five tips for starters.
Draw up or review Wills
If you want any control over what happens to your assets when you’re gone; who gets them and in what proportion, you need a Will.
A Will is a legally binding document and provides clear instructions your executors, making things easier for them in executing your wishes. Should you have very specific wishes, for example on what type of funeral you’d like, you can put this in a letter of wishes, which can accompany your Will.
Without a Will, you would die ‘intestate’. Dying intestate means that your money and assets follow a prescribed route and will pass to family in a certain order, depending on what family you have and whether you get on with them or not!
A common misconception is the idea of ‘common law spouse’ and an unmarried partner being entitled to your money should you die without a Will, but this is not the case.
There can sometimes there can be benefits to being married when it comes to IHT allowances but that’s a topic that probably requires another blog post on its own!
Having a Will ultimately gives you more control and makes the administration process easier. It also reduces the chances of family disputes, which can sadly occur.
We recommend all our clients have Wills and these are reviewed every now and again to ensure what’s contained within them still reflect your wishes.
At this point it’s worth mentioning a bonus point. As and when you draw up your Wills, we strongly recommend considering drawing up Lasting Powers of Attorney (LPAs); one covering your health and welfare and another covering your property and financial affairs.
These documents ensure that an individual or group of people you have nominated, can make decisions on your behalf should you become mentally incapable of making those decisions yourself. Whilst not strictly Estate Planning focussed, it makes sense to get your LPAs done at the same time as your Wills.
Understand your liability to IHT
Inheritance Tax allowances seem to get more complicated as time goes on.
Most people know that you get a £325,000 per person allowance, called the Nil Rate Band, but this has been complicated in recent years by getting an additional £175,000 per person, called the Residence Nil Rate Band. You get this allowance as long as you are passing your family home to ‘direct descendants’, which are typically children or grandchildren.
You can get a portion of this allowance if you downsize or move into care and sell or rent out your home.
If you’re unmarried, you get the basic Nil Rate Band and also the Residence Nil Rate Band if you have a child or children to pass your home on to.
The total value of your assets, including your home is valued at your date of death, and if the total exceeds your combined available allowances, your executors/administrators will have to pay tax at 40% of the value of your assets over the allowances, before passing on the proceeds to beneficiaries.
If you’re married, you get twice the allowances, so up to a total of £1 million, and the value of your combined assets is tested on the second death.
There are situations in which your allowances are reduced, but these don’t happen often, and it would make this blog post a lot longer to cover them all!
Understand how much you can gift
Everyone has gifting allowances, so if you think you might have an inheritance tax liability currently, or your parent/s or someone else you know might does, it’s worth understanding what the rules are about giving money away.
Your motivation might be to reduce the value of your estate so that less tax is paid overall, or you might want to help family and friends now when they might need it and you can get to see them benefit from it, rather than when you’re gone.
For larger gifts, you will need to live for 7 years for it to fall out of your estate completely.
Each person can gift up to a total of £3,000 each year, with no requirement to live for any length of time thereafter, before the money is outside of your estate. In addition, you can gift limited amounts to family members when getting married, as well as gifts to any person up to £250 per year. You can gift this to as many people as you like each year.
In addition, if you have ‘excess’ income, which means to say income that you wouldn’t normally have spent by the end of the month, you can give this away each month on a regular basis to whoever you like. Again, you do not need to live for any length of time for this to be outside of your estate. If you are to do this, it is important that gifting the money away each month has no material effect on your standard of living, otherwise it is not allowable.
Spend!
One of the simplest and most enjoyable ways of reducing the size of your estate is to spend your money! Our personal recommendation would be experiences with family and friends which create memories rather than on material things, but each to their own.
Something we’ve seen our clients loved doing in the past is taking their family on a big holiday, such as a cruise, or to Disneyland if they have younger children. This can be even more special if the family otherwise might not be able to afford the trip without your help.
If this isn’t for you and you’d like to spend it another way, consider if there are ‘bucket list’ type things you would like to do but never yet have. There’s no time like the present as they say!
Engage with a Financial Planner
There’s no getting away from the fact that Estate Planning is a complex area, firstly because of the financial numbers, allowances and tax considerations you need to think about.
Just as importantly, you need to consider how you feel about paying inheritance tax as a concept, what your thoughts are on funding your own care, and whether you can afford and want to gift money during your lifetime, or when you’re gone. All these points help determine what are the right and wrong things for you personally to be doing in your Estate Planning.
We always discuss these various topics with our clients, because there is no set standard way to approach Estate Planning. We always want to ensure we understand your values and point of view and incorporate it into your financial plan, to make it reflect what you want.
All our clients at this stage of life have a Lifetime Cashflow Forecast, which shows your projected total asset level over time. This can help inform us as to whether we need to be undertaking Inheritance Tax Planning and how much you could potentially gift, as well as keep some back for care, if that is something you’d like to self-fund if required.
Combining this cashflow projection, our knowledge and experience of advising clients on Estate Planning, along with understanding your views and wishes, we’re confident that we can provide invaluable Estate Planning and advice, which benefits you and your family for the long term.
If you’d like more information on Estate Planning, you can download our toolkit here. Or if you’d rather have a chat about your circumstances, feel free to get in touch.
Please feel free to share this content if you think this could be of interest to someone you know, or your social network, via the buttons below.