Introduction to estate planning
In this article we run through the basics of estate planning and show you how to get started.
Published on 12 Nov 20184 minute read
What is estate planning?
The simple definition of estate planning is passing on your assets to the people that matter to you in the most effective way. This could be your children, nieces and nephews or even a charity or political party.
It can reduce an Inheritance Tax bill
Many people start estate planning because they want to reduce the amount of Inheritance Tax that their beneficiaries will pay on their estate when they die. Inheritance Tax is a tax on the transfer of assets you hold during life and on death. For UK-domiciled residents it applies to assets that you hold all over the world including savings and investments, property and ‘chattels’ – objects such as jewellery and cars.
Inheritance Tax is charged at 40% on the value of your estate above the nil rate band.
Inheritance Tax is charged at 40% on the value of your estate above the nil rate band – which is currently £325,000 per person. There is also a residence nil rate band which can be used for passing on your home to your direct descendants. This allowance is currently £125,000 per person. Both nil rate bands can also be transferred between married couples and civil partners.
Spending and making gifts
The simplest forms of estate planning are spending money and giving it away. Both will reduce the size of your estate and therefore the size of the potential Inheritance Tax bill. While spending is straightforward, there are tax rules and allowances to consider when making gifts.
Certain gifts are completely free from Inheritance Tax and will leave your estate immediately. These include:
- Gifts of up to £3,000 per tax year
- Unlimited small gifts to individuals (up to £250 per person)
- Up to £5,000 given to a child or £2,500 to a grandchild towards their wedding
- Regular gifts from surplus income, which will not affect your standard of living
- Unlimited gifts to charities
Gifts that are not covered by these allowances may still be free from Inheritance Tax if you live for at least seven years after making them – but the rules can be complex.
Keeping control over the gift
It won’t always be in your best interests to make direct cash gifts – sometimes you need to keep some control over the money. For example, if the beneficiary is too young or irresponsible to look after the money, or you are concerned about the money being wasted if the recipient got divorced or spent it on a failing business.
It won’t always be in your best interests to make direct cash gifts – sometimes you need to keep some control over the money.
In these situations you could set up a trust instead of making an outright gift. This lets you choose who the money goes to, when it can be accessed and how it can be spent. A financial planner can give you more information and help you to set up a trust.
Procrastination is the enemy
When it comes to estate planning, it’s never too late to start – but the earlier you start, the more you can do. Of course it’s also important to make sure that you don’t leave yourself vulnerable in later life by spending or giving away too much money early on.
When it comes to estate planning, it’s never too late to start – but the earlier you start, the more you can do.
If you have questions about estate planning, you want to know how much you can afford to give away or you just want to get started, please book an initial consultation with our financial planners. It is free of charge and we can speak to you over the telephone or at your home or nearest Tilney office.
Advice in relation to trusts and Inheritance Tax planning is not regulated by the Financial Conduct Authority, however, the products used to mitigate tax may be regulated.
All figures, unless stated, are from YouGov Plc. Total sample size was 6,031 adults. Fieldwork was undertaken between 16th and 19th October 2018. The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).
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