Estate planning is something I can help you with by giving you a top-down overview, pointing out the risks, costs and possible solutions. If you decide you want to look at it in more detail then I can put you in touch with a specialist to do that.
Inheritance Tax is the tax on the value of your estate when you die and includes all your assets including your home, cash, investments, and other belongings such as cars, furniture, and heirlooms. Before the beneficiaries of your estate can receive any money, this tax needs to be paid.
For most people, the largest asset, value-wise, within their estate will be their home. Locally, this can mean for many that their house value takes them over the threshold for inheritance tax, meaning their estate will be liable to pay it, prior to their beneficiaries receiving their inheritance.
By chatting with financial advisers and planning ahead, you can mitigate the inheritance tax bill and ensure both you now, and your beneficiaries in the future have the money to live comfortably.
Inheritance Tax is payable once your estate exceeds the threshold, which will be fixed to £325,000 until 2026. Anything in excess of this figure (known as the nil-rate threshold) is taxed to 40 per cent. There are various ways this bill can be reduced or managed.
There is also the additional ‘main residence’ allowance, known as the Residential Nil Rate Band (RNRB), which applies if a person’s home is given to their children or grandchildren. This is set at £175,000 and is added to the IHT allowance, giving a total allowance of £500,000. If a relative passes away and the estate is worth more than £325,000 per individual or £500,000 (if the main residence allowance applies), families are required to pay the amount in excess of the NRB within six months.
Simply releasing money from your home does not of course move it outside of your estate. In order to do that, you have to literally spend it!
Or of course, pass it on to family or friends by way of a gift. Even then, it can still be recognised as remaining inside the estate by the Revenue. A Potentially Exempt Transfer or PET provides for a mechanism to move money outside of your estate and reduce the IHT burden over a period of 7 years until it becomes fully exempt from IHT. We can talk this through in more detail when we meet.
Trusts can be a way of managing the amount of inheritance tax that will be due because in most cases, once money, investments, or property are put into a trust, you do not own them anymore and they will not count towards an Inheritance Tax bill. This is a legal arrangement where a trustee owns the assets in the trust and have a duty to look after and manage them. The beneficiary is the person who the trust has been set up for. When you set up a trust, you can set rules as to how it is managed.
Trusts come in different forms and there are variations on the rules, depending on what type of trust it is. As your financial advisor and knowing your individual circumstances we can advise you if this is appropriate and the best type to use.
These are the main types:
Bare Trusts
These trusts, which are sometimes called simple or absolute trusts, hold assets on behalf of another person, until they choose to take ownership of them.
Discretionary Gift Trusts
This is the most popular type of trust and means that you put assets into a trust and specify how you would like them to be used.
Mixed Trust
This type of trust incorporates characteristics of several types of trusts.
Trust for a vulnerable person
Also known as a trust for disabled beneficiaries, this is a type of trust for someone who is otherwise unable to look after the trust for him or herself.
Non-resident Trust
This is a trust administered by trustees who are not resident in the UK for tax purposes.