Planning your finances with a view to inheritance after your death seems to many people, to be either unnecessary or simply a bit strange; it is assumed by a great number of people that either all of their assets will pass straight to their spouse or next of kin, or that their assets are not significant enough to warrant any sort of plan. In reality, though, efficient inheritance planning is vitally important, and can make a huge difference to your financial legacy.
First StepsThe first step in inheritance planning is ensuring that you know exactly what you would like to happen to your estate after your death. In most cases this involves the spouse or civil partner inheriting all of the individual’s assets; you may also wish to leave specific financial provision for children. The next important step in the process is drawing up a will. This is a vital document, as it should explicitly lay out your intentions with regard to your estate. However, writing something along the lines of “I leave everything I own to my partner” is unlikely to be the most financially efficient option for the beneficiaries of your will.
One of the major purposes of inheritance planning is to minimize your Inheritance Tax liabilities. Inheritance Tax, or IHT, is covered in more detail elsewhere on this site; the purpose of this article is to help ensure that you pay as little of it as possible. The Exchequer’s own advice states that no IHT will be paid if you leave your entire estate to your spouse or civil partner.
However, what happens when they die? Everyone is entitled to an allowance of £285,000 (known as the Nil-Rate Band) before they incur IHT, but many people waste it. At this stage, you should consider what sort of tenancy you have. In many cases it may be possible to set up a Discretionary Trust for your property, in which your legal share of the house is placed into trust on your death, and then loaned to your spouse. On their death, the loan is repaid from their estate and then passed onto your children, thus maximizing the use of both Nil-Rate Bands.
GiftsIf you are considering giving away portions of your assets to people other than your spouse, it is almost certainly worth looking into doing this now, rather than waiting until your death. Gifts given more than seven years before your death are exempt from IHT, and even in the seven years you are entitled to a non-taxable allowance of £3,000 annually. In this way, you could give away up to £21,000 within this time without fear of having to pay tax. You should remember, however, that only ‘outright’ gifts qualify for these tax exemptions; if you give away the legal title to an asset, but continue to benefit from it in some way then the asset will still count as a part of your estate on death and will, therefore, be potentially taxable.
Many people also look at equity release schemes, particularly after retirement. Under these arrangements, you can raise capital from the value of your house (or sometimes the portion for which you have already paid, if you have an outstanding mortgage) which is then repaid once the house is sold. This is particularly useful if you are considering downsizing your property, as it can release useful cash. Furthermore, a smaller property means a smaller estate, and thus a smaller tax liability.