Life is uncertain. None of us know all it will hold, but there are two things to be sure of. The first is that it will come to an end at some point, and we will leave behind those we love, and who depend on us.
The second is that the taxman will most likely be waiting to take a share of the wealth we have made, and which we would rather went to those loved ones.
Estate planning is key to keeping our wealth out of the taxman’s hands.
What exactly is estate planning?
The problem is inheritance tax, or IHT. Once intended as a tax on only the very wealthiest estates, increasing house prices have meant that many more people have been caught by it.
Inheritance tax is charged on everything in your estate – which includes the value of property as well as any cash and investments you hold – above the current threshold value of £325,000. But going past that figure is easy to do these days with high property prices and large pension pots. As soon as you do your estate becomes taxable. The taxman can help himself to 40% of everything above the threshold, although there is a concession which lets you exclude your family home. The IHT home allowance or residence nil-rate band is currently £175,000 which allows you to pass your home to certain relatives such as children or grandchildren. When added to the nil-rate band of £325,000, this can potentially allow an individual to leave an estate valued up to £500,000 without incurring an IHT charge.
During the 2022/23 tax year, HM Revenue & Customs collected a record £7.1 billion. The Office for Budget Responsibility has estimated a figure of £7.2bn in 2023/24
But there is some good news. It may be possible for you to reduce or mitigate IHT with estate planning. Also known as inheritance tax planning, estate or succession planning, it simply means arranging your affairs to limit the wealth lost to the taxman on your death. But actually, doing it can be difficult, 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.
How does estate planning work?
There are several ways to keep your assets away from the taxman, but all have to be used carefully to avoid the pitfalls that lead back to tax liability.
You can leave anything you want to your spouse or civil partner, free of tax while you are alive. So your widow or widower should be safe in the home you have shared.
You can give away cash. Giving before you die will mean that no IHT is payable – as long as you live another seven years after giving the money away.
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 can 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
The rules around leaving and inheriting an estate are complex, and getting professional advice on tax and estate planning is essential – because mistakes may mean your cash going to the taxman rather than your loved ones.
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. We can advise on how to arrange your will to help minimise your IHT.
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. Simply call us at Continuum for the understanding and 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 a particular Inheritance tax strategy you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate taxation and trust advice or will writing
Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change.