How do you keep your wealth in the family? Preparing your estate for your beneficiaries is one of life’s biggest pleasures. Everyone wants to leave a meaningful legacy to their loved ones. Yet, how can this be done effectively? The rules for inheritance tax (IHT) are notoriously complex and subject to change. Moreover, modern family structures are often more varied and nuanced than in previous generations – e.g. involving children from multiple past marriages.
In this guide, our Tees Valley financial planners offer a short guide to estate planning for families. Our goal is to inspire you as you begin the process of optimising your assets for IHT. We hope these insights are helpful. Please contact us for more information or to speak with a financial adviser here in Teesside:
t: 01228 210 137`
e: [email protected]
The basics
Some concepts need defining at the outset. Your “estate” refers to all of your assets – i.e. things of value – which fall under the IHT system in the UK. These can include cash savings, ISAs, property, furniture, vehicles, and even personal possessions (e.g. jewellery).
IHT is normally levied at 40% on the total value of your assets over £325,000. This is known as the Nil Rate Band (NRB). So, to take a simple example, suppose an individual owns £500,000 in a general investment account (no other assets). When she dies, £325,000 of this amount will be shielded from IHT. The rest would be taxed at 40% (i.e. a £70,000 IHT bill).
However, the IHT system in the UK is far more complicated than this. For instance, in most cases pension pots are currently not counted as part of an individual’s estate, but ISAs are. So, an individual who dies with £500,000 in a defined contribution pension would generally not see that pot taxed under IHT. However, someone with £500,000 in ISAs would see the savings and investments taxed (if the underlying investments do not qualify for Business Relief).
It gets even more complicated when considering rules and reliefs around property, gifting, and how tax-free allowances work for married couples.
Getting started with a plan
A good initial step is to ask yourself what your goals are for your estate plan. Is your primary intention to leave your children as much wealth as possible? Do you want to leave financial provisions for your surviving spouse? Are you hoping to donate to charitable causes?
With your goals established, it helps to survey your estate. What are your assets and liabilities? What are your income streams and expenses? Consider making a list of everything you own (e.g. the equity in your home) and everything you owe (e.g. the outstanding mortgage). Adding everything up can start to give you an idea of the value of your estate. To do this effectively, and to ensure nothing is left out, consider working with a financial adviser.
Check the value of your estate against the Nil Rate Band (NRB). Are you over the threshold? If so, how much? If not, could your assets grow in value and take you over the tax-free threshold in the future? These questions will help to reveal whether additional estate planning is necessary to reduce your IHT exposure.
Building your family estate plan
With your goals and current position mapped out, it will work best if the process is repeated for each person in your family estate plan (e.g. your beneficiaries). This will help everyone to understand the priorities and positions of each person, managing expectations and optimising each plan for maximum benefit.
For instance, if you are planning on leaving any unused pension funds to your children, consider how this may affect their own financial plans. In 2024-25, an individual can inherit pension funds without a tax liability if the original owner dies before the age of 75. However, if they die after age 75, then the received funds will be regarded as earnings by HMRC when taken out of the pension. In some cases, this has resulted in beneficiaries getting pushed into a higher income tax bracket without realising, creating knock-on effects on their wider finances (e.g., a reduced Personal Savings Allowance as they enter the higher rate).
Again, working with a financial adviser can help make everyone aware of these kinds of risks and plan accordingly. Other critical steps in the estate planning process include creating an up-to-date will (stipulating who should get what, how, and when) to avoid the UK’s intestacy rules, and possibly setting up power of attorney. The latter bestows decision-making authority to a designated person (or persons) if you become unable, or unwilling, to make decisions independently about your lifestyle and estate, perhaps due to ill health.
Once your family estate plan is finalised, clients report feelings of huge relief and a deep sense of peace. It is comforting to know that, whatever happens, your family will be looked after when you are gone. In the meantime, you can enjoy life without big money worries hanging over you.
Invitation
If you would like to discuss your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
e: [email protected]
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.