The importance of estate planning
Passing on wealth to future generations is one of the most rewarding things you can do with your hard-earned money. The assets you pass on could help your children or grandchildren to buy homes, support their education, or set up their own business. Estate planning can help with ring-fencing as much as you can in order to mitigate the amount of Inheritance Tax or IHT you will need to pay.
There have been discussions and proposals around reforming the inheritance tax treatment of pensions in future. While pensions are currently outside the estate for IHT, this is an area under ongoing review and should be kept under consideration as part of wider estate planning.
Inheritance Tax used to be something that applied only to wealthier individuals but now affects more and more families. You may be liable for up to 40% Inheritance Tax on your assets in excess of the Nil Rate Band.
What Is the Nil Rate Band
Every individual has a Nil Rate Band for IHT purposes. This is currently set at £325,000 and is transferrable between spouses. As the Nil Rate Band transfers across to the surviving partner of marriages and registered civil partnerships, you could end up with a tax-free allowance of up to £650,000.
There is a further Residential Nil Rate band for individuals who pass their Main Residence to their children as part of their estate. This is an additional £175,000 available if the estate is not valued at over £2,000,000. This would mean £1,000,000 of estate is exempt from inheritance tax if you are married and have children and an estate worth less than £2,000,000. For every two pounds your estate is valued over £2,000,000, the Residential Nil Rate Band is reduced by £1.
Anything over your Nil Rate Band is subject to IHT at 40% but there are other ways of reducing the impact of inheritance tax with careful planning.
Lifetime Gifting & Other Options
There are other ways to mitigate inheritance tax. These include gifting during your lifetime, the use of trusts and debts against the estate.
By using gifting allowances to fund investments for your children – currently, a lump sum of up to £3,000 per year, and unlimited gifts of £250 per year – parents and grandparents can benefit from the transfer of wealth without any Inheritance Tax penalties.
Larger gifts may be treated as potentially exempt transfers and could become subject to inheritance tax if the donor dies within seven years
The use of gifts and trusts are best understood in the context of your own personal circumstances as they involve irrevocably giving capital away during your lifetime. It is important to have a discussion with a qualified financial advisor to ensure all these options are explored fully before making life changing decisions.
Business Relief
One means of IHT planning is to invest into assets that qualify for Business Relief. There is no fixed monetary cap on Business Relief; eligibility depends on the nature of the qualifying business assets held. We can recommend products that allow you to invest into qualifying assets. You must hold these assets for 24 months before they become zero rated for inheritance tax if they are still held upon death.
Wills and intestacy
A will gives you the freedom to decide how you want to pass on your assets. It can be essential in providing for your dependants and is a useful tool in inheritance tax planning.
If you die without a will – known as ‘intestate’ – your estate is distributed according to intestacy law. This means you will have no control over who gets what.
Ensuring that your Will is up to date, and accurately reflects your wishes, is fundamental to successful estate planning. We work closely with specialist Will writers and can provide recommendations in this area if required.
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