The coronavirus has forced all of us to recognise that life is uncertain, and we all need to prepare for the future.
That may include building our wealth and preparing for a prosperous retirement. But there is something else we need to look at – planning how we will transfer our wealth to the next generation when we will be using it no more. This is estate planning. Like every other aspect of finances, in the wake of the coronavirus, it may need a fresh look.
What exactly is estate planning?
The problem is inheritance tax, or IHT. While it was intended to be a tax on only the very wealthiest estates, increasing house prices pushing up people’s net wealth has meant that many more people have been caught in its net. There is no Inheritance Tax to pay if the value of your estate is below the £325,000 IHT threshold. Go past that figure – which is easy to do these days with high property prices and large pension pots – your estate becomes taxable. If you don’t take the right precautions, the taxman can help himself to 40% of everything above the threshold.
It may be possible to take advantage of the Residents Nil Rate Band, which is currently £175,000 for Tax year 2020/2021. This would be in addition to the £325,000 Nil Rate Band. There are potentially other tax breaks which could be used i.e. the transfer of unused Nil Rate Band between spouse/civil partner.
During the 2018-19 tax year, HM Revenue & Customs collected a record £5.4 billion from Inheritance Tax, marking a 3% rise, around £166 million on the previous year
Those precautions are the focus of estate planning, also known as inheritance tax planning. It involves arranging your affairs to limit the amount of wealth that is lost to the taxman on your death. It is a complex business because of the many considerations that need to be taken into account. These include the size of your estate, your current health, whether you can afford to give some cash or assets away, and what you might need in the future.
All of these factors may have been affected by the falls in the markets, and possibly in your personal wealth as a result of the coronavirus crisis.
How does estate planning work?
The rules around leaving and inheriting an estate are complex and getting professional advice on tax and estate planning is essential. Not only does it make sure your wishes are respected, it can provide peace of mind that your heirs can inherit your estate in the most tax-efficient manner.
There are a number of measures that you can use.
You can give anything you want to your spouse, be they married to you or a civil partner, free of tax for their lifetime. So, your widow or widower should be safe in the home you have shared. You can also give away your home to your children or grandchildren.
Your Will is one of the most effective ways to minimise IHT liabilities. Without one, your estate would be dealt with according to the Rules of Intestacy, which could mean more of it would go to the taxman.
You can even make certain gifts. Gifting before you die will potentially mean that no IHT is payable on the amount of the gift. You must live another seven years after giving the money away to avoid ‘deathbed giving’, but you have a £3,000 tax-free gift allowance to use each year and you can also give up to £250 each year to anyone or make a wedding or civil ceremony gift to a family member up to £1,000 per person, £2,500 for a grandchild or £5,000 for a great-grandchild.
You can put cash, property or investments into a trust. But remember that assets placed in trust only fall outside of your estate for IHT purposes if you live for at least seven more years.
You can even insure your life to help mitigate IHT. A whole of life insurance policy may provide a simple, although not cost-free solution. Take out a policy in trust, and your executors can use the proceeds to pay off the IHT bill.
Get some expert advice
IHT is a complicated tax, and the measures you need to avoid it can be more complicated still.
You need expertise not just in tax – but in understanding your overall financial position to ensure that you have measures in place which will keep your wealth safe from the taxman – but still allow you to enjoy the lifestyle you need.
It is time for a fresh look at all your finances, and getting expert advice, and getting it as soon as possible will help. Simply call us at Continuum for the advice you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable Estate Planning, Tax advice or investment strategy, you should seek independent financial advice before embarking on any course of action.
The Financial conduct authority does not regulate taxation, trust advice, Estate planning or Will writing.
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