Give your money to your loved ones – not the tax man
Estate Planning is often misunderstood as something that only very wealthy people need to do in order to avoid paying Inheritance Tax (often abbreviated to IHT) on their estate. This isn’t the case and, with property prices as high as they have ever been, many average households are likely to pay unnecessary amounts of Inheritance Tax if they do not take the right measures through sensible Estate Planning.
More and more people are at risk of seeing the amount they can pass on to loved ones seriously diminished by tax. So, if you’ve owned your main residence for a number of years and have some savings and investments, now could be the time to talk to a Chartered Financial Planner to ensure your wealth is protected and destined for your loved ones, not the tax man.
What is Estate Planning?
Estate Planning is a broad term that describes the process of arranging your wealth, personal belongings, property and financial assets so they can be transferred to a designated person, group of people, or perhaps a charity without paying unnecessary sums of Inheritance Tax. For example, this may include keeping your will up to date, arranging a trust for loved ones, or gifting some of your assets or wealth. This is normally an inter-generational transfer, such as a parent’s estate passing to children or grandchildren. Put simply, Estate Planning ensures you can transfer the right assets, to the right place, at the right time.
Estate Planning is a legal procedure that allows you the freedom to arrange your finances and assets in the most tax-efficient way as long as you or your financial adviser observe the limits that the UK government places on various kinds of tax relief. Some of these are lifetime allowances and others are annual. When it comes to Estate Planning, it is best to seek highly qualified and experienced Chartered Financial Planner as effective planning will often require a number of arrangements to be made together.
How much can Inheritance Tax reduce the value of an estate?
Normally, Inheritance Tax is payable on the total value of your estate when you die. This includes your belongings, property, pensions, investments and savings, and life assurance. In the UK, most people will not have to pay Inheritance Tax on the first £325,000 of the value of their estate (or £650,000 for couples). Anything above this is usually taxed at 40% and any tax must be paid before the estate can be transferred.
For example, a single person with an estate valued at £1,000,000 would receive a tax charge of £270,000. This is because there is no tax to pay on the first £325,000 and Inheritance Tax of 40% charged on the £675,000 above this allowance, which is called the ‘nil rate band’. Estate Planning could reduce the amount of the tax charge significantly – in fact, Inheritance Tax is one of the few taxes that can be significantly reduced or avoided altogether with careful, professional planning.
What are the key considerations for Estate Planning?
Effective Estate Planning may require only a few small changes to how your wealth is organised or it may be more complicated, requiring a number of arrangements and financial policies to minimise the Inheritance Tax liability on your estate. Here are a few arrangements that are commonly used in the Estate Planning advice process: