Estate Planning Background

Inheritance Tax (IHT) is a tax charge levied on death. The rate of tax (typically 40%) is applied to your ‘estate’, should it exceed available allowances (Nil Rate Band and Residence Nil Rate Band). Valuing the estate for IHT purposes can be complicated, as certain assets and allowances can be deducted, and certain previously held assets need to be included. Advice should be sought if uncertainty exists.

The estate of the deceased is settled under the terms set out in the deceased person’s Will, or if no Will exists under the laws of intestacy. If completed under a Will, nominated Executors settle the estate via Probate, and Inheritance Tax submissions are made directly with HM Revenue and Customs. Any IHT due must be paid by the Executors within six months of the end of the month in which the individual died.

IHT Allowances

The ‘Nil Rate Band’ refers to the part of the deceased person’s estate that is exempt from Inheritance Tax. At present, this is the first £325,000 of the estate – having not increased since 2009. If the Nil Rate Band is not used in full, any remaining element can be transferred to a surviving spouse or civil partner.

The RNRB is an additional allowance that is available to those that pass their home to a direct descendant. This applies to the family home only – Buy to let properties are disregarded.

This allowance provides a further £175,000 per person if the estate is valued at less than £2,000,000. If the estate exceeds this maximum level, the RNRB is reduced by £1 for every £2 above. Therefore, an estate of £2,350,000 will not be able to apply for the RNRB.

A gift of assets or capital can impact the value of the estate, depending upon who the recipient is and how the gift has been made.

  • Gifts to a spouse or civil partner are exempt from IHT.
  • Every person has an annual gift allowance, up to £3,000 per annum. If unused, this allowance can be carried forward by one year.
  • You can make gifts of £250 per year to as many people as you wish, however, this allowance is not available if gifting more than £250 to any one person.
  • You can make gifts out of excess income. This can be a very effective allowance, however, the assessment of ‘excess’ and definition of ‘income’ needs careful
    consideration. Again, if any uncertainty exists, advice should be sought.
  • Gifts to Charities and certain institutions (for example, universities, museums, and political parties) are free from Inheritance Tax. If at least 10% of the estate is given to charity, it is possible to reduce the rate of IHT from 40% to 36%.
  • Gifts that are outside of these allowances may also be tax advantageous. The rules surrounding these Potentially Exempt Transfers (PETs) and Chargeable Lifetime Transfers (CLTs) can be complicated, with considerations around Gifts with Reservation and Pre-owned Assets Tax being of particular relevance. Professional advice should be sought in such instances.


Estate Planning and Trusts

Trusts are separate legal entities that are established to hold assets for the benefit of others (the Beneficiaries). The person that establishes the Trust (the Settlor) appoints Trustees to manage the Trust on their behalf. By putting assets into a Trust, they are no longer included within the Settlor’s for Inheritance Tax purposes, provided certain conditions are met.

The Beneficiaries of a Trust can either be specifically named within the Trust deed (these Trusts are commonly known as Absolute or Bare Trusts), or the Trust deed can give the Trustees control over who eventually benefits from the Trust’s assets (these Trusts are typically known as Discretionary Trusts).

The tax rules surrounding Trusts can be very complicated, with many pitfalls that have severe consequences. Seeking professional advice is an important element when establishing and maintaining Trusts.

Estate Planning Activities

The term Estate Planning describes the financial planning exercises that are undertaken when a person looks to optimise their Inheritance Tax situation. Typically, this involves minimising their exposure, factoring in the relevant legislation, regulation, and tax rules.

Further, the exercise should not detrimentally impact the person’s standard of living within their lifetime.  There can be many elements to effective estate planning, including:

It is important to ensure an up-to-date Will is in place that accurately reflects the person’s intentions. Without a valid Will, the estate may be distributed according to the laws of intestacy. A good Will should aim to simplify the situation, with the involvement of greater complexity only if there are clear and quantified benefits. It is also worth considering how a person’s financial affairs will be managed if they lack the capacity to do so themselves in the future. This can be overcome by establishing Lasting Power of Attorney.

Gifting and the utilisation of available gift-related allowances. Careful consideration is needed to ensure any gifts do not fall foul of the relevant restrictions, resulting in unnecessary tax costs. Again, this should be done to ensure the actions do not impact the person’s financial stability throughout their lifetime.

With pensions typically not forming part of a person’s estate for Inheritance Tax purposes, there can be significant tax savings when utilising pensions as part of your estate planning. This should include accurately documenting the beneficiaries of a pension via an expression of wish.

Life assurance and Whole of Life cover held in Trust can be a cost-effective method of meeting Inheritance Tax costs. This allows the estate to pass assets to Beneficiaries without the need to sell property or chattels within the deceased person’s estate, with the insurance pay out bypass the probate process and making capital available more promptly.

Tax-efficient investments that utilise potentially advantageous structures and products. For example, certain types of investments may qualify for Business Property Relief, rendering them exempt from Inheritance Tax if held for two years. Such investments are typically more complex and should not be considered without specialist investment advice.

Establishing tax-efficient Trusts, structured to meet the specific requirements set. Consideration should be given to the Trust’s own tax charges and costs, in life and upon death.

Planning to utilise available allowances, including the Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB), plus understand when any of the available allowances are tapered.


Estate Planning Advice

With the political and taxation landscape constantly evolving, it is important to regularly review any estate planning put in place. If ignored, there is the risk of previously effective planning becoming either less effective, or in some instances result in unintended complexity and liability.

Regardless of the situation you face, seeking independent advice can provide tangible benefits, minimising the Inheritance Tax you pay, and increasing the legacy available for your loved ones.

Walpole Financial Management provide specialist Estate Planning advice, helping you to assess your potential exposure and proposing specific actions to best optimise your estate planning position.

With the highest level of qualification, over 100 years of collective experience and with expert knowledge of how to construct effective plans, Walpole Financial Management are best positioned to help you achieve your Estate Planning requirements.