Inheritance tax and estate planning is about deciding how your wealth should be passed on while making sure you retain enough money to support yourself throughout your lifetime.
A good estate plan can bring together your property, investments, pensions, savings and other assets and consider how they could eventually be transferred to your family or other beneficiaries. It can also identify opportunities to reduce a potential inheritance tax bill.
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What Is Inheritance Tax?
Inheritance tax (IHT) is a tax that can be charged on your estate when you die.
The standard nil rate band is currently £325,000. There is also a residence nil rate band of up to £175,000 where qualifying conditions are met, including leaving a qualifying home to direct descendants. The standard inheritance tax rate is 40% on the taxable part of an estate above the available allowances.
Married couples and civil partners can generally transfer unused allowances between them, meaning some couples may potentially pass on up to £1 million without inheritance tax, depending on their circumstances.
Start Estate Planning Early
Inheritance tax planning is generally more effective when you start early rather than waiting until later in life.
The first stage should be establishing the value of your estate, including property, savings, investments and other relevant assets. You can then estimate your potential inheritance tax liability and consider how you would like your wealth distributed.
However, reducing inheritance tax shouldn’t come at the expense of your own financial security. Cashflow modelling can help estimate how much money you are likely to need throughout your lifetime and how much you may comfortably be able to give away.
Gifting Money to Your Family
Gifting during your lifetime can be an effective part of estate planning.
There is currently an annual £3,000 gifting exemption. Certain regular gifts made from surplus income can also fall outside your estate immediately, provided the relevant conditions are satisfied.
Larger outright gifts to individuals are generally treated as potentially exempt transfers. If you survive for seven years after making the gift, it will normally fall outside your estate for inheritance tax purposes.
This can allow you to help children or grandchildren with major expenses such as education or buying a home while potentially reducing the eventual value of your taxable estate.
Using Trusts and Insurance
Trusts can provide another way of passing wealth between generations, particularly where you want greater control over when and how beneficiaries receive money.
Life insurance can also form part of inheritance tax planning. A suitable policy written in trust could potentially provide beneficiaries with money to help meet an inheritance tax liability rather than requiring assets to be sold to pay the bill.
These arrangements can be complex and professional financial, tax and legal advice may be required.
Don’t Forget Your Will
Estate planning involves more than reducing inheritance tax.
Having an up-to-date will can help ensure your estate is distributed according to your wishes. You should review it after significant changes such as marriage, divorce, having children or grandchildren, acquiring significant assets or changes to your financial circumstances.
People with overseas property or other international assets may need additional legal and tax advice to ensure their estate planning works across different jurisdictions.
How Can Financial Planners Help With Inheritance Tax and Estate Planning?
Financial planners like Saltus provide inheritance tax and estate planning as part of its wider financial planning service.
Saltus starts by helping clients determine how much wealth they are likely to need for their own lives before considering how much can comfortably be given away. This can help people make gifts without unnecessarily compromising their future financial security.
Its advisers can then help clients consider areas including gifting, the nil rate band, residence nil rate band, spousal exemptions, charitable giving, discretionary trusts and life insurance policies designed to cover a potential inheritance tax liability.
This allows inheritance tax planning to become part of a wider financial plan rather than simply focusing on reducing tax. The objective is to balance enjoying and maintaining your wealth during your lifetime with passing it to the people and causes that matter to you as efficiently as possible.