As with anything in life, planning is key. A well-thought-out plan for managing your estate, how you may wish for it to be administered and shared between your heirs could prove useful when dealing with family circumstances and planning for tax purposes.
Should I make a will?
Some may choose to leave a will, others may not, depending on their circumstances. A recent survey by Royal London found that 54% of UK adults don’t have a will.[1]
If you pass away without a will, you pass away ‘intestate’ and your estate is distributed as per the ‘Rules of Intestacy’ where you reside. These rules set out who will inherit your estate in a specific order. It’s important to remember that if you are not married or in a civil partnership your partner is not treated as a family member, so any assets you solely own will not automatically pass to them.
If your estate is complex, you may want to consider making a will naming the beneficiaries to your estate and appointing your executor to administer your estate.
However, a will does not necessarily set your inheritance in stone as a will can be ‘contested’ if you are not deemed to have capacity when you made your will or if your dependants don’t feel you’ve made sufficient provision for them. Beneficiaries may also choose to sign a ‘deed of variation’ to expand and allow more flexibility to the list of beneficiaries, although all beneficiaries must agree with this.
Inheritance Tax (IHT)
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. The current threshold for paying Inheritance Tax is £325,000, so anything over this amount will be subject to Inheritance Tax at 40%.
However, there are some exception to this. For example, spouses or civil partners inherit tax free upon the passing of the other partner, known as the ‘transferable nil rate band’[2]. Any of their allowance that they don’t use can also go to their spouse or civil partner’s estate when they pass away. If you own your home (or a share in it) your tax-free threshold can increase to £500,000 if you leave it to your children and your whole estate is valued at less than £2million[3]. If you chose to leave 10% of your net estate to a charity, this will usually qualify you to pay Inheritance Tax at a reduced rate of 36%.
Despite difficulties in the financial markets, it is expected that inheritance and therefore its taxation will continue to increase in coming years. It is currently a £27bn ‘business’ in the UK (between 2017-2021). This is predicted to increase to £37bn in coming years until 2027, mostly as a result of inflation and increasing property prices, resulting from real estate demand[4] and increases in house prices. A personal tax expert at PwC recently estimated that the threshold should stand at £478,078 in 2022, a difference of £153,078, which could have allowed many households to qualify for tax free inheritances for their families[5].
Making gifts before you pass away
Yearly gifts may be a popular consideration, though they have limitations as limits are in place on the amount of money which can be given as a gift per year.
Gifts are not taxable if they are made at least 7 years before the person making the gift passes away. They should not exceed £3,000 per annum and £325,000 in total, otherwise Inheritance Tax will be due. The amount due would depend on how long ago the gift was made.
Life insurance policies
Life insurance policies (must be held on trust to be valid), pensions and life trust are other usually tax-free options. A life insurance policy will typically provide either a lump sum of regular payments to whoever you name on your policy.
Do keep in mind that as you get older the money invested in such schemes may lose value due to inflation or that your life policy may increase to an unmanageable amount which you have to continue paying for your beneficiaries to remain entitled.
Having a funeral plan
The cost of a funeral is not just the unfortunate, unexpected personal burden that falls upon the family, but also a financial strain, with the average cost of a funeral being around £4,000. A funeral plan can also set out your final wishes, which can help to take the pressure of making those decisions from your family.
However, there are risks involved when choosing your funeral provider ahead of time as seen by the collapse of the ‘Safe Hands’ in March 2022 which affected 46,000 customers. The good news is that funeral plans will soon be regulated by the Financial Conduct Authority (FCA) as of July 2022.
In conclusion
We would always recommend that you consult a professional when it comes to planning for your estate. One such organisation which specialises in this area is STEP, which is a ‘global professional body, comprising lawyers, accountants, financial advisors and other practitioners that help families plan for their futures’[6]. They help to set standards, train and educate our members, and ensure standards are upheld.
[1] https://www.which.co.uk/news/2018/12/half-of-adults-dont-have-wills-but-what-happens-to-your-children-when-you-die/
[2] Finance Act 2008, IHTM43001 — Inheritance Tax Manual — HMRC internal manual – GOV.UK (www.gov.uk)/ Transferable nil rate band (TNRB) | Practical Law (thomsonreuters.com)
[3] How Inheritance Tax works: thresholds, rules and allowances: Passing on a home — GOV.UK (www.gov.uk)
[4] Paragraph 1, Families could pay £37bn in IHT in next five years — FTAdviser.com
[5] Inheritance tax threshold ‘cut’ by £150k as Sunak freeze hits — new IHT stealth raid shock | Personal Finance | Finance | Express.co.uk
[6] https://www.step.org/about-step/public
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