Estate Planning
The main aim of Estate planning is to help you to distribute your wealth (Estate) to whom you want it to go to at the time you want and to avoid paying any unnecessary tax.
The process includes arranging how you would like your Estate distributed upon your death and making plans, during your lifetime, that help to ensure your assets are passed on as tax-efficiently as possible. In some circumstances, it can also mean passing on some of your Estate during your lifetime or protecting your Estate against unexpected circumstances.
At Trevor Downing (IFA), we’ll work closely with you to gain a comprehensive understanding of your present financial position before putting forward our proposals to help you distribute your Estate.
Inheritance Tax Planning (IHT)
Most people wish to protect their wealth for future generations. Here at Trevor Downing (IFA), we have an exceptional range of knowledge and expertise on how best to achieve your financial aims and ensure you pay as little tax as possible.
Vast amounts of Inheritance Tax could be avoided with some careful planning in advance. In some cases, even after the death of a loved one, arrangements can be made to improve the tax situation on the Estate, but it is far more effective to plan in advance.
Inheritance Tax is paid on an Estate when somebody dies if it exceeds a certain value. It is also payable on some gifts or assets placed in trust during a person’s lifetime. On average, most Estates do not have to pay Inheritance Tax because they are valued at less than the threshold (£325,000 in 2020/21). Inheritance Tax is payable at 40% on the amount over this threshold.
Income Protection
To find out if Inheritance Tax is due on an Estate, you must first value the Estate. This means adding up the value of all the assets in the Estate such as house, possessions, money and investments and then deducting any debts the deceased may have owed, including household bills and funeral expenses. We can handle this process for you and provide you with a firm valuation of your Estate.
An Estate also includes the deceased’s share of any jointly owned assets and the value of any assets held in certain types of trust.
You should also review any gifts that the deceased may have made in the seven years prior to their death to see if they are exempt, and if they are not exempt include them in the overall value of the Estate. In some cases, Taper Relief may be available.
From 6 April 2017, the rules on Inheritance Tax changed, providing for an additional “family home” allowance called the Residence Nil Rate Band (RNRB) or additional threshold where an individual has a qualifying property that forms part of their Estate. In 2020/21 while the standard Inheritance Tax threshold (Nil Rate Band) remains unchanged on 2019/20 band at £325,000, the Residence Nil Rate Band has increased from £150,000 to £175,000. Individuals can now pass on assets, which include the family home, to their children or grandchildren worth up to £500,000 each, with no Inheritance Tax liability.
So a married couple could, in effect, pass on an Estate valued up to £1m without paying Inheritance Tax. Certain lifetime gifts can be made without giving rise to an Inheritance Tax charge. For the current tax year, the annual gift exemption is £3,000 and it is worth considering making a gift of this amount if you are in a position to do so.
In addition, if you did not make use of any part of the £3,000 annual gift exemption to which you were entitled in 2019/20, then this can be utilised before 5th April 2021 as long as the current year’s allowance is also fully used. It can only be carried forward for one year and then, if unused, it is lost.
Unlimited gifts can also be made in the form of Potentially Exempt Transfers (PETS), provided you live for 7 years after making the gift, it will be free of Inheritance Tax.
Gifts of £250 can be made to any number of separate individuals without giving rise to an Inheritance Tax charge. Gifts of varying amounts can also be made between family members on the occasion of a wedding/civil partnership ceremony, without any Inheritance Tax liability.
Who is responsible for paying Inheritance Tax?
Inheritance Tax is payable by different people in different circumstances. Usually, the executor or personal representative pays it using funds from the deceased’s Estate.
The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, must pay Inheritance Tax – but this is not common.
Can I reduce the amount of Inheritance Tax that I have to pay?
There are many ways that you can reduce the amount of Inheritance Tax that you have to pay, such as:
Annual Inheritance Tax gift exemption
The first £3,000 given away each tax year is completely ignored as part of your Estate and is not subject to Inheritance Tax if you die. If you do not give away the money this year, you can carry it forward for one tax year (no more) and use it then as long as the current year’s allowance is also fully used. Gifts to charities and political parties are Inheritance Tax free.
Charitable Donations
As well as the gifts themselves being free from Inheritance Tax, leaving at least 10% of your net Estate to a charity can lower the rate of tax you have to pay on your taxable Estate from 40% to 36%.
Small gifts exemption
Gifts of no more than £250 each to any number of recipients per tax year are excluded from Inheritance Tax (and are not counted toward the annual gift exemption). For example, someone with 12 grandchildren could give each of them £250 annually as a birthday present and it wouldn’t be counted as part of the Estate.
Regular gifts out or income
As long as they do not reduce your standard of living these gifts are immediately out of your Estate.
Gifts on marriage
Gifts of £5,000 from a parent, £2,500 from a grandparent, and £1,000 from anyone else made to a bride or groom are exempt from Inheritance Tax.
Woodland, heritage, farm and business
If you own an agricultural property that’s part of a working farm, then a percentage may be exempt from tax. Similarly, if you own woodland, those who receive it in your Will can apply for the timber on it, but not the land itself, to be deemed exempt. Do check what happens when the timber is sold, as Inheritance Tax may apply at that time.
Make other gifts and survive 7 years
Lifetime gifts to other individuals or into trusts that do not fall within one of the above exemptions will fall out of your Estate after 7 years. Gifts into discretionary/flexible trusts can suffer an immediate 20% Inheritance Tax charge if they exceed your available Nil Rate Band.
Equity release / Lifetime mortgages
It is now possible to arrange a lifetime mortgage on your property without having to make any repayments until the last owner dies. Since Inheritance Tax is based on the net value of the Estate, the debt from the mortgage will reduce the Estate value and hence the Inheritance Tax. The amount raised on the mortgage can be gifted to family members and, providing you survive for 7 years after the gift is made, it will not count as part of the Estate for Inheritance Tax purposes. To learn more about equity release, click below
Wills
One of the first fundamental aspects of any financial planning is to make sure you have a legitimate tax-efficient Will in place. Regardless of whether you have a small or large Estate the complications involved when someone dies intestate (without a Will) are immense. So often we see Wills that are not tax-efficient or arrangements that have become void (for example due to marriage or divorce). Our STEP-approved solicitors are on hand to help you create a Will or indeed review your existing Will to ensure it is tax efficient, for a very reasonable fee.
What you need to know in relation to Wills
We are proud that we are able to select from a panel of top Will and Trust specialists to review your existing Wills entirely free of charge. We strongly advise that you take advantage of this service because so many Wills are not written correctly and are not fully tax efficient.
What you need to know
When a person dies without having made a valid Will the legal term for this is Intestacy. Under these circumstances, the Estate of the deceased passes under statutory rules.
The Estate is handled by an administrator (usually the next of kin or close relative) who is appointed by the Probate Registry after applying for Grant of Representation.
The horror of dying without a Will means that your Estate will be left in a manner prescribed by law and apart from a mess often left behind for beneficiaries, even worse, your Estate may not be distributed as intended.
In order to deal with an Estate on the death of an individual, you need a Grant of Representation and in the document, you would need to confirm your legal status and ability to deal with the deceased’s Estate. A Grant of Representation may be required whether or not the deceased person left a Will. If the deceased left a Will appointing Executors, then Executors would normally apply for a Grant of Probate to administer the Estate.
If there was no Will, next of kin apply instead for a Grant of Letters of Administration. When an individual dies without making a Will, the law decides who gets what, meaning the intended beneficiaries could miss out altogether.
Intestacy rules
We all know of many disasters where people have died without making a Will. Creating a Will is always seen as something which can be done later.
We believe one of the first aspects of a financial review and recommendation is to ensure that our clients have the right tax-efficient Wills in place to protect their families and to ensure that their wishes are followed.
Making a Will is simple and straightforward and we help our clients through the whole process. However, there can sometimes be emotional barriers to go through and we can help people through this process. The first step is to ensure that the Will writing specialists have a clear understanding of your wishes in order for them to, after discussion with you, prepare a draft Will for you to consider. Once this is agreed the final Will can be correctly signed by you and witnessed. Having this in place brings great peace of mind.
For added peace of mind, we always recommend that clients write a Letter of Wishes, which is attached to their Will. This Letter of Wishes details any personal wishes that they would like to ensure that their Executors and Trustees will follow. We’ll support you in creating your Letter of Wishes and ensure it can be changed as often as you like without amending the main Will.
Lasting Powers of Attorney
This is an area that is often overlooked until it is too late, and the consequences can be financially or emotionally disastrous. Far too many people have the misconception that these are only needed later in life but, all too often, this is too late.
LPA’s are put in place to allow your nominated Attorney to manage all areas of your life, whether it be Property and Financial Affairs or Health and Welfare or both, in the event that you become unable to make these decisions due to illness or long-term disability.
For instance, if a person becomes too ill to live without constant care or supervision and does not have an LPA for Health and Welfare in place, the state can decide on where that care will be provided and the family may not be able to have any control over the decisions. From a financial perspective, once a person becomes too ill or incapacitated to make decisions, they can no longer make a new LPA and this means simple things like everyday banking cannot be undertaken by someone else, let alone more complex decisions such as long term Estate planning, investments or even selling the family home.
Arranging suitable LPA’s at an early stage means there will always be someone (the attorney(s) ready to step in and take over the affairs to ensure the wishes of the family can be met.
Funeral Expenses
Although it may seem obvious, planning for funeral expenses is often overlooked and can lead to anguish for the bereaved family. The average cost of a simple funeral in the UK is currently in excess of £6,000 and this must be paid before an Estate can be settled.
For many families, this represents a large sum of money and they often have to borrow the funds leading to additional costs and stress at what is already a stressful and emotional time.
Simple planning such as arranging a life policy written in trust for the beneficiaries can avoid this and make the whole process and arrangements far easier for the remaining family or representatives.
Life Insurance
A life policy can be written that will cover the value of the potential Inheritance Tax liability. This can be placed into trust for your beneficiaries meaning it does not form part of your Estate for Inheritance Tax purposes. Since it is in trust, the proceeds will be paid out quickly to the beneficiaries meaning they have the funds to pay any Inheritance Tax bill without having to sell assets from the Estate and this will mean probate can be granted more quickly.
Our specialist team are on hand to help you with your Estate Planning needs and ensure your Estate is distributed in a way that suits you. Please feel free to get in touch to discuss our Estate Planning services.