It might not be the most pleasant of tasks, after all, it involves thinking about your own mortality. However, for most people, making a will is the first step on the journey to comprehensive estate planning and ensuring that nothing is left to chance after your death.
From putting in place powers of attorney, to making sure that your wishes are carried out if you are unable to make important decisions, to understanding and mitigating Inheritance Tax (IHT), a will is just the first step.
So, assuming you have made your will (and millions of people haven’t) where should your attention turn next?
Inheritance Tax (IHT)
The first job is to calculate whether IHT will be payable when you, your spouse or both of you die.
When your family, or other beneficiaries inherit your estate, IHT may become payable. At the time of writing, the nil rate band, the amount of money that someone can leave before tax is due, is £325,000.
There is no tax to pay if the estate is worth under this, or it is being passed onto:
- Your spouse
- Your civil partner
- A charity
The term ‘estate’ refers to any assets that a person leaves when they die. This isn’t just a house; it includes money, investments and possessions such as jewellery and vehicles.
Residence nil-rate band (RNRB)
In April 2017, the Government introduced the RNRB.
This effectively increased the IHT allowance for those who own residential property that is being left to their children or grandchildren (adopted, foster, step or otherwise). In the 2017/18 tax year, this increased the threshold by £100,000, giving a total IHT allowance of £425,000.
Further increases are planned over the following years, with an increase of:
- £125,000 in 2018/19
- £150,00 in 2019/20
- £175,000 in 2021/22
Assuming the rules don’t change, the threshold will increase in line with the Consumer Prices Index (CPI) from 2022 onwards.
So, how much IHT will your family have to pay if your estate is valued over the threshold?
Currently, the rate is 40%, and is only charged on the part of the estate that falls over the threshold. This can be a significant amount for those with large estates. In fact, the amount the Government is raising from IHT is increasing; in the year ending May 2017, £5.1 billion in IHT was collected, up 9% from the previous year.
Many people see IHT as a voluntary tax. It was Lord Jenkins who said: Inheritance Tax is a voluntary tax, paid by those who distrust their heirs more than they dislike the Inland Revenue.”
Whilst this is no longer entirely true, proper planning can vastly minimise the amount your beneficiaries pay.
One of the simplest ways of reducing the IHT paid on your death is to take advantage of the various exemptions available.
The first of these is to leave your estate to your spouse or civil partner. No matter how large your estate, any amounts left to your spouse or civil partner are exempt from IHT. However, whilst this is effective in the short term, the IHT bill is essentially delayed until their death.
Other exemptions can help reduce the IHT paid on your death:
- You can give up to £3,000 away each tax year and it is immediately outside of your estate for IHT purposes. If you’ve not used this allowance, it can be carried over for one tax year
- You can give wedding or civil ceremony gifts of up to £1,000 per person (or £5,000 for children and £2,500 for grandchildren)
- You can give gifts out of your income, up to any value, and they are immediately outside of your estate for IHT purposes, providing you can maintain your standard of living after making the gift
- You can give as many gifts each year, up to a value of £250
- You can give gifts to charities and political parties
There is actually no limit on the amount of money that can be given away. However, amounts above the above gift exemption limits will only be fully outside your estate if you survive at least seven years from the date you made the gift. If you die within seven years, tax is potentially payable, which is why these gifts are known as Potentially Exempt Transfers (PETs).
Calculating the value of your estate will give you an idea of how much your beneficiaries will be taxed. Once this has been done, you can start to take measures to ensure that no unnecessary tax is paid, and your family can inherit more of what is rightfully theirs.
Power of attorney
A power of attorney is a legal document that allows you to appoint a person (or people) to make decisions on your behalf. There are different types of power of attorney. The one generally considered important in estate planning is lasting power of attorney (LPA), which replaced enduring powers of attorney (EPA) in October 2007.
There are two types of LPA:
- Health and welfare
- Property and financial affairs
Arranging an LPA is important, as it gives someone you trust control over what happens if you are unable to make decisions yourself.
According to the Alzheimer’s Society, more than one million people in the UK will have dementia. An LPA ensures that important decisions can be made according to an individual’s wishes if they lack the mental capacity.
LPAs aren’t only relevant for elderly people. Whilst the elderly are more prone to mentally debilitating illness, many younger people in the UK suffer accidents or illnesses that leave them mentally incapacitated. Without an LPA, family members may face long and expensive delays to access your assets and finances.
More information about LPAs, including the relevant forms and prices, can be found on the Gov.uk website here.
Wills, much like life, can be very complicated.A general rule for a will is to assume nothing. There are times when certain things, such as remarrying, can work against your wishes, and a trust can remove any uncertainties.
Putting a trust in place isn’t the easiest of processes (or the cheapest), and it isn’t for everyone. But, it can ensure that the interests of certain people, such as children, get put first.
Don’t do it alone
Wills, trusts, LPAs and IHT are complicated matters, and whilst some areas may seem relatively straightforward, you will encounter plenty of surprising and seemingly illogical quirks to the law along the way.
A solicitor, and a suitably experienced and knowledgeable Financial Adviser are the bare minimums you’ll need ensure the right amount of money, is put in the right hands, at the right time, with as little tax deducted as possible.
For more information about the complex world beyond a will, don’t hesitate to get in touch using the phone number at the top of the page.