Whether you have earned your wealth, inherited it or made shrewd investments, you will want to ensure that it can be enjoyed by you, your family and your intended beneficiaries, and not the taxman. With a bit of estate planning, you could gain a semblance of control over what happened to your assets when you passed away. An estate plan could also help ensure that your assets were transferred in an orderly manner with inheritance tax liabilities minimised.
1: Make a Will: A Will puts you in control. You chose who benefits from your estate and what they would be entitled to. Without one, the intestacy rules would decide who benefitted and that could produce undesirable results. A Will on its own won’t necessarily reduce any tax your estate may be subject to, but would ensure that your wishes were carried out when you died.
2: Make a Lasting Power of Attorney (LPA). LPAs are made for property and financial affairs as well as health and welfare. These documents may be put in place at any time. It is important to consider setting them up, no matter how old you are. An LPA, best written along side a Will, sets out your wishes as to who should assist you in relation to your property and financial affairs, health and welfare should you need it.
3: Plan for inheritance tax: In many ways, inheritance tax is voluntary. Ray Jenkins describes it as “A voluntary tax paid by those who distrust their heirs more than they dislike HMRC.” Voluntary? Yes, because there are many ways in which to avoid your estate paying an excessive amount of inheritance tax, which is typically charged at 40% on the value of everything you own above the nil rate band threshold of £325,000. Many reliefs and planning opportunities are available. One simply needs to find out what they are and take advantage of them.
4: Gift assets while you are alive: Estate planning isn’t simply about passing on your assets when you die. It’s about analysing your finances now and making the most of your assets while you are still alive. By making use of gift allowances each year, you could enjoy seeing your assets being put to good use in your lifetime while simultaneously reducing your inheritance tax bill. Allowances could include gifts to children, grandchildren, charities, friends and family.
5: Invest in IHT exempt assets: There are investment vehicles that could potentially minimise inheritance tax. These schemes are generally higher risk and therefore not suitable for all investors. As such, decisions should always be made with the benefit of professional financial advice.
6: Life insurance: Writing life insurance within an appropriate trust would ensue that the proceeds be paid directly to your beneficiaries rather than to your estate. This can be very useful in estate planning. Using the wrong trust could however make the inheritance tax situation worse. Again, seek professional legal or financial advice before making a decision.
7: Keep wealth within a pension: Unlike many investments, pensions are normally free of inheritance tax, so keeping your wealth within your pension fund could be advantageous. If you were to die before age 75 your beneficiaries would inherit your pension tax free; as long as your pension provider knew who your nominated beneficiaries were. Your financial adviser should be able to help you with this.
We can’t take our assets with us when we die, therefore creating an estate plan whilst you are alive is crucial. Especially if you would prefer your beneficiaries, rather than HMRC, to benefit from your lifetime of hard work and saving.