Estate Planning
Estate planning is one of the best ways to avoid paying too much inheritance tax.
It could even help you to avoid paying it altogether. This is because when you are able to review all your assets early on and outline your wishes you can portion and divide them intelligently based on legislation and current rates of taxation. There are several key ways you can avoid paying inheritance tax:
1. Make gifts to family members and friends
Gifts are one of the best and most efficient ways to avoid inheritance tax.
If you can afford to do so, distributing money early on rather than waiting and leaving sums in your will is incredibly tax-efficient. This is because the overall amount of assets you leave behind (over £325,000) will be subject to inheritance tax. This is currently set at a rate of 40% – but this could rise unexpectedly.
You are permitted to give cash gifts of up to £3,000 a year – so with forward planning you could give away a significant amount without having to pay tax. If you choose to give away more than £3,000 per year the additional amount will be subject to taxation.
There are some types of gifts that are exempt from taxation altogether. These include gifts between spouses or civil partners, gifts to universities or charities (subject to qualification) and any gifts given over seven years before your death.
2. Set up a trust fund
Traditionally trust funds are set up to ring-fence assets for children and young people who aren’t yet financially independent.
But trusts are also a fantastic way to reduce or avoid inheritance tax payments altogether. Trust funds are fully protected from inheritance tax and can be set up at any time.
Trusts can be set up to provide advance payments drip-fed to family members to allow them to receive inheritance early. But trust funds also have benefits for those with life insurance policies, as they provide a significant amount of tax relief.
Without trust funds in place your life insurance pay out is added to your estate and taxed. When your life insurance is set up in trust it cannot be included in any inheritance tax calculation.
3. Intelligent spending
Spend within your means – saving for necessary future expenses whilst spending intelligently on items and experiences you will enjoy.
4. Provisions for necessary spending
Don’t forget to factor in necessary spending such as home improvements, mortgage payments, maintenance and other things you may need in the near or distant future such as a new car.
5. Don’t forget to research your individual situation
Inheritance tax rules and regulations vary depending on your personal status. For instance, for married couples or those in civil partnership the threshold can potentially increase to double that of an individual – currently £650,000. This can be increased still further if you own a property that you intend to leave to your children
6. Why is writing a will in conjunction with estate planning important?
It is vitally important to write a will – even if you are very young and don’t have any health issues – as without one nobody can be sure of your final wishes.
Being without a will also leaves you open to taxation and exploitation from relatives who may be entitled to take some or all of your assets against your wishes.
Sitting down to write a will provides you with an opportunity to consider what you’d like to happen to your assets once you pass away.
It also ensures that you nominate an individual or individuals to be in charge of carrying out your wishes – known as an executor.
If you die without making a will (also known as ‘intestate’) arranging your assets and affairs will become very complicated for your family.
Intestacy rules are incredibly complex. If a suitable beneficiary is not found the government may be entitled to seize the full amount of your assets upon your death.
Several factors are in play – including your marital status, whereabouts you live in the UK and the value of your estate.
A will is therefore essential if you have clear wishes on how your assets are distributed after you pass away. You can leave property, money and personal items to named beneficiaries.
However it’s important to bear in mind that without proper estate planning your relatives and assets may still be affected by inheritance tax. You can also leave gifts to charity in your will if you have a cause or causes you wish to support.
7. Is specific estate planning advice based on my situation important?
You may need tailored estate planning advice depending on the complexity of your situation.
In most cases it is straightforward – but understanding the different options available to you and deciding which ones to choose can be a daunting and difficult task. Having a Shore Wills on board can be incredibly useful for this reason.
They will conduct a thorough review of your assets and situation, taking into account any investments, property, pensions, businesses, life insurance and savings.
This enables them to acquire an accurate picture of your financial status and determine the impact inheritance tax may have on your estate. They’ll also take into account your future needs and personal preferences.
Shore Wills will then work with you to discover the most effective way to protect your assets in order for you to pass them on to those you love.
It is likely that they will put together a bespoke estate planning strategy that may include various trust funds, investment structures and policies to cover your assets completely.
Don’t forget that as legislation does change you will need to arrange regular reviews to ensure that your plans are still up to date and can still deliver for you when needed.
8. Consider care provision during the estate planning process
It’s important to remember to consider the possible future need for (and cost of) care when estate planning.
If you tie all your money up in trust funds or give it all away as gifts, you may find yourself without the funds to pay for care in the future. This is a difficult balance to achieve.
Base your decision on realistic expectations, and assume that you may need some money set aside for care or additional support in the future.
If you have ongoing health issues or an early diagnosis of a progressive disease such as Alzheimer’s, it’s especially prudent to get your finances in order now whilst you are of sound mind.
It’s also key to make sensible and realistic provisions for the cost of care if it is likely that you’ll need support either at home or in the form of nursing or residential care.