It isn’t always clear how you should pass your wealth on to your loved ones. Inheritance tax (IHT) rules in the UK are notoriously complex and subject to change. Moreover, the nature of your estate (which includes everything you own, such as property, possessions and savings) can become more intricate over time as your assets grow. Having access to an experienced financial planner can be immensely helpful to ensure you organise your estate tax-efficiently, and that your final wishes are respected.
We offer this short guide on estate planning in 2020 to assist your thoughts on this important topic. Whether this is of interest to you, or other family members, we hope this content is useful and invite any questions you may have about how this could affect your financial plan, via:
t: 01228 210 137
Family estate planning
It’s a common view that estate planning is only for very wealthy families. This is not true. If you have loved ones and any assets, even if it’s a house with a mortgage you’re still paying off, then you will need an estate plan. Without one, you risk leaving your beneficiaries with a complicated mess to sort out when you are gone.
Family estate planning looks different for everyone. Yet at the very least, it will involve crafting a legally-sound will to express your final wishes for your estate. The size and nature of your estate will affect what goes into this legal document, and how everything should be organised for tax purposes. One of the biggest challenges for many, will be mitigating IHT.
In 2020-21, IHT is levied at 40% on the value of your estate over £325,000. For many people in the North of England, the value of their property may well fall within this threshold, but some of your other assets (e.g. cash savings, other properties and investments in ISAs) may not. An estate plan will help to ensure that your IHT exposure is minimised, and that the final bill can be settled without any unforeseen consequences such as beneficiaries needing to sell your home.
Strategies to consider
It is a shame for anyone who has spent a lifetime building wealth to pass on to their children and other loved ones, only to see it excessively eroded by taxes due to poor planning. Fortunately, it is possible to craft an estate plan with an experienced financial professional. The precise nature of this plan will vary from case to case, but here are some strategies to consider:
Business succession
In 2020-21, the good news for business owners is that your business can usually be passed on to the next generation with 50%-100% Business Relief from Inheritance Tax (IHT), on some of an estate’s business assets.
Bear in mind that not all businesses qualify for Business Relief from IHT. If it deals primarily in land or buildings, for instance, then it will likely not qualify. As such, landlords should be wary of transferring properties from their own name into a company structure, purely for IHT purposes.
Pensions
Most assets are included within the value of your estate for IHT purposes. One notable exclusion from the list in 2020-21 is your pension savings.
In short, you can usually pass on the value of most defined contribution pensions to beneficiaries, free of tax, if you die before the age of 75. After this age, anything your beneficiaries withdraw will be added to their Income Tax bill, possibly pushing them into a higher tax bracket if not carefully planned for. Not all pensions allow this, and you may be affected by the Lifetime Allowance, so you should always speak to your Financial Planner to discuss whether this applies to you.
This IHT exemption on certain pensions can open up the possibility of using them for estate planning purposes. Consult your financial planner if you think this approach may be relevant to you.
Bear in mind that your State Pension cannot be inherited by children and that final salary pensions (or defined benefit pensions) are also usually not able to be passed on, although some will provide a reduced pension for a spouse and possibly for dependent children under age 23.
Trusts
If you place property, investments or other assets into a trust then, assuming everything is structured correctly you do not technically ‘own’ them any longer. As such, depending on how the trust is constructed, they may not be included within the value of your estate for IHT purposes.
Setting up a trust, however, is a big decision and there are many complex rules to navigate. For instance, certain trusts allow you to exert more control over the assets placed within them, although this often comes at the cost of less IHT ‘shielding’. You will need to carefully consider who you will designate as your trustees and also make appropriate provisions if you are using life insurance within your estate plan. On this latter point, bear in mind that any payout from a life insurance policy may be counted within the value of your estate and also taxed, if not placed into a trust correctly. Here, your Financial Planner can be tremendously helpful in providing the right advice.
Invitation
If you would like to discuss your financial and estate planning, 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
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.