Estate planning and taxes: What you need to know

Estate planning is a crucial aspect of financial management allowing you to manage and preserve your wealth during your lifetime. It also helps you to efficiently transfer your assets to your beneficiaries after death. Understanding the intricacies of estate planning can help you minimise tax liabilities and ensure your estate is distributed to your wishes.

Tara Bell, Partner at Westcotts, explains the basics of estate planning and how you can efficiently transfer your assets.

The basics of inheritance tax (IHT) and estate planning

Inheritance Tax (IHT) is currently charged at 40% on estates above a certain threshold. There are several bands:

• Nil-Rate Band: The first £325,000 of an individual’s estate is taxed at 0%. Any amount above this threshold is taxed at 40%.
• Residence Nil-Rate Band (RNRB): An additional threshold of up to £175,000 if the estate includes a family home left to direct descendants.
• Transferable Nil-Rate Bands: Both the nil-rate band and RNRB can be transferred to a surviving spouse or civil partner, potentially allowing a couple to pass on up to £1 million tax-free.

There are several exemptions and reliefs:

• Spouse and Civil Partner Exemption: Transfers between spouses and civil partners are generally exempt from IHT.
• Charitable Donations: Gifts to qualifying charities are exempt from IHT.
• Business Property Relief and Agricultural Property Relief: Certain business and agricultural assets can qualify for reduced IHT rates.
• Gifts and Potentially Exempt Transfers (PETs): Gifts made more than seven years before death are generally exempt from IHT. Gifts within seven years of death may be subject to IHT, with a taper relief reducing the tax rate over time in certain cases.

Strategies to minimise estate taxes

The starting point for all estate planning is to review where you are now. You should start with a list of your current assets and liabilities, together with current values, so that you can consider what exemptions, reliefs and nil-rate bands should be available to you. This allows you to quantify the current potential liability.

You then need to think about the end goal. This should include where you would like certain assets to end up and what assets and income sources you want or need to retain for your lifetime. You should also consider whether you are happy to pass assets to beneficiaries outright or would want to retain a level of control or protection for them.

Once you have the starting point, and your desired end goal, you can work on putting in place the correct planning and strategy to move forward. There is not a ‘one size fits all’ answer to estate planning, and each case needs to be looked at on its own merits.

As part of any estate planning, it is essential to make sure you have an up-to-date Will in place. Without a Will, your estate will be distributed according to intestacy rules, which may not reflect your wishes. You should regularly review your Will, alongside any planning taking place, to ensure it reflects your current wishes and circumstances. You should also update your Will after significant life events such as marriage, divorce, or the birth of children. Lasting Powers of Attorney should also be considered at the same time.

The use of Trusts

Trusts can be a useful tool in estate planning but are not right, or necessary, for all situations.

A trust is a legal arrangement that allows you to transfer assets to trustees to manage on behalf of beneficiaries, either during your lifetime or on your death. Trusts can help reduce IHT in certain cases and protect assets for future generations.

It is important that you seek professional advice to understand the tax implications of different types of trusts.

Next steps

Estate planning requires careful consideration of various legal and tax-related factors. You should work closely with your solicitors, financial advisors, and tax specialists to develop a comprehensive estate plan.

Whilst nobody has a crystal ball to predict our future, it’s important to understand the key components of estate planning. In also understanding the intricacies of Inheritance Tax, you can develop a strategy that ensure your assets are preserved. It will also ensure that your assets are distributed according to your wishes.

Regularly reviewing and updating your estate plan, utilising trusts and exemptions, and consulting with professionals can help you achieve these goals and provide peace of mind for you and your loved ones.

If you would like to undertake a review of your current position, with a view to developing a strategy for the future, get in touch with Tara by email tara.bell@westcotts.uk or call 01278 458 251.

There may be changes to Inheritance Tax (IHT) following the recent change in government, so it is advisable to review any existing planning in light of potential legislative updates.