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Writer's pictureGreg Heath

How to leave a legacy and what you need to know

Ensuring the preservation of wealth for future generations is a crucial component of a thorough financial planning strategy.


Effective planning is essential for reaching this objective. Transferring the wealth you have diligently accumulated can be a complex process. By dedicating time to prepare in advance and comprehending your Inheritance Tax obligations, you can guarantee that your assets and funds are passed on according to your wishes upon your demise, potentially preventing your family from incurring significant tax expenses.


WHAT IS INHERTANCE TAX?

Inheritance Tax is a tax on an estate (the property and possessions) of someone who’s died. Intergenerational planning helps you put measures in place to benefit your children later in life, and even your future grandchildren, but it’s important to start planning early. You might wish to retain a level of control while transferring your assets.


If you have specific intentions for your money, like covering educational expenses or saving for a down payment on a house, you can designate its use. Alternatively, you may prefer to ensure that your funds remain within the family.


Failure to make adequate arrangements may result in Inheritance Tax being due on your taxable estate upon your death. It's crucial to bear in mind that your taxable estate comprises all assets owned by you, your portion of jointly owned assets, and your share of assets passing automatically by survivorship. Thoughtful planning can decrease or potentially eliminate the Inheritance Tax liability.


There are three main parties you can allow to have access to your estate:


  1. your beneficiaries,

  2. a charity or

  3. the government.


The choice is yours. Others might include legacies or gifts to political parties or for national purposes.


You have the ability to name your beneficiaries and financially help them replace lost income or wealth. But it doesn’t have to be income or wealth.


It is worth bearing in mind that if you do not have a plan in place, you potentially risk a large portion of your estate going to the government so ignoring this issue is NOT an option.


Questions I often get asked are as follows;


  • how much can I afford to give away?

  • What is the best timing and order for my gifts?

  • Should I take out insurance?

  • Is it worth setting up a trust?

  • Will a trust benefit my circumstances?

  • Could I afford long-term care?

  • Do I need to downsize my home or maybe release equity?

  • Is my Will structured tax-efficiently?


It is worth noting that inheritance Tax is not payable on the first part of the value of your estate – the ‘nil-rate band’ allowance. The current 2022/23 nil-rate band is £325,000 and is set to remain at this level until at least 5 April 2028. This allowance hasn't changed since the tax year 2010/11.


No Inheritance Tax needs to be paid if the total value of your estate is within the nil-rate band allowance. Any outstanding debts and funeral expenses can be subtracted from the estate's value.


An additional ‘residence nil-rate band’ (RNRB) allowance was introduced in 2017 and is available if you leave your interest in the family home to direct descendants (such as children, stepchildren and/or grandchildren). This can apply to any individual property that has been your residence at some time and can be available even if that home had been sold after 7 July 2015.


For the 2022/23 tax year, the maximum RNRB additional allowance is £175,000 (frozen at this amount until 5 April 2028), potentially increasing your total Inheritance Tax allowance to £500,000 (£1,000,000 for a married couple). We can advise you on the ways that you may mitigate any exposure, including these:


THE NEED TO MAKE A WILL

If you pass away without a Will, you may not be taking full advantage of the Inheritance Tax exemption available when you want your estate to go to your spouse or registered civil partner. Not having a Will could result in other relatives besides your spouse or civil partner being eligible for a portion of your estate, potentially leading to an Inheritance Tax obligation.


MAKE LIFETIME GIFTS

Non-exempt gifts made more than seven years before the donor dies are free of Inheritance Tax. Exempt gifts are immediately out of the donor’s estate. So, it might be appropriate to pass on some of your wealth while you are still alive. This will reduce the value of your estate when it is assessed for Inheritance Tax purposes, and there is no limit on the sums you can pass on. You can gift as much as you wish to other individuals or bare trusts with no immediate Inheritance Tax issue. This type of gift is known as a ‘Potentially Exempt Transfer’ (PET) and beware the PET rules.


If you live for seven years after making such a gift, then it will be exempt from Inheritance Tax, but should you be unfortunate enough to die within seven years, then it will still be counted as part of your estate. However, if the PET is above your nil rate band, the longer you survive after making the gift the better.


LEAVE A PROPORTION TO CHARITY

Being generous to your favourite charity can reduce your tax bill. As well as the gift itself being exempt from Inheritance Tax, if you leave at least 10% of your net estate to a charity or number of charities, then your Inheritance Tax liability on the taxable portion of the estate is reduced to 36% rather than 40%.


SET UP A TRUST

As part of your Inheritance Tax planning, you may want to consider putting assets in trust – either during your lifetime or under the terms of your Will.


Putting assets in trust – rather than making a direct gift to a beneficiary – can be a more flexible way of achieving your objectives. Family trusts can be useful as a way of reducing Inheritance Tax, making provision for your children and spouse, and potentially protecting family businesses. Trusts enable the donor to control who benefits (the beneficiaries) and under what circumstances, sometimes long after your death. Compare this with making a direct gift (for example, to a child), which offers no control to you once given. When you set up a trust, it is a legal arrangement and you will need to appoint ‘trustees’ who are responsible for holding and managing the assets. Trustees have a responsibility to manage the trust on behalf of and in the best interest of the beneficiaries, in accordance with the trust terms. the terms will be set out in a legal document called ‘the trust deed’.


PASSING ON YOUR PENSION

This area is often overlooked in my expereince as pension death benefits can be passed on from generation to generation with the right planning.


After 2015, pension funds can be passed on tax-free to a beneficiary if death occurs before the age of 75. When someone dies after that age, the beneficiary can draw the fund at their own marginal rate of tax. The beneficiary has options for receiving the death benefits: lump sum, drawdown or annuity. What's more, they don't have to be a dependent to benefit – the definition is much wider than that. If a lump sum is chosen, it will become part of the beneficiary's estate and should be taken into account when considering Inheritance Tax and any Will planning. To make sure everyone whom you want to have access to dependents' drawdown is included in your plan, review your nomination forms and check whether your pension scheme provides those flexibilities.


THE NEED FOR DEVELOPING A CLEAR PLAN

The process involves developing a clear plan that details how you would like all of your wealth and property to be distributed after your death.


It involves putting documentation in place to ensure that your assets are transferred in line with your wishes to minimise the risks of inheriting assets being caught in the inheritance tax trap.




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