PRACTICAL STEPS

Estate planning can seem like a complex exercise, and often there can be a lot of detail and some complex issues to work out. Nevertheless, there are some straightforward steps you can take before delving into anything complicated.

1. Write a will

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Setting up a will should be the first step in any estate-planning exercise, not only to make certain that matters are dealt with in a tax-efficient way but to ensure that your wishes are carried out. Having a will means you avoid relying on the intestacy rules that come into play where there is no will. Effectively the law then decides what happens to the estate, which can lead to financial anxiety for the surviving spouse along with a possible immediate charge to inheritance tax on the first death.

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It is also important to consider wills for those who aren’t married with children, but who have considerable assets, since under the rules of intestacy the estate would pass to their parents (rather than brothers or sisters), potentially  increasing their Inheritance Tax liability.

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2. Prepare a Lasting Power of Attorney for Property & Financial Affairs

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Without a Lasting Power of Attorney if you temporarily or, if the worst happens, permanently lose the mental capacity to make your decisions you really do lose control of what happens to your estate and assets. With a properly prepared Lasting Power of Attorney you can set out your preferences and your instructions about how you would like your affairs to be managed and by whom. You can specify key financial decisions that require review by professionals and other trusted advisers. You can make sure that your priorities continue to work in harmony with your estate plan and your will.

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3. Check that you actually have an IHT liability

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It may sound obvious, but it is worth considering when Inheritance Tax actually applies. Each individual has a tax-free allowance of £325,000, known as the nil-rate band. Inheritance Tax only applies to the value of the estate above this at a rate of 40 per cent on death.

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However, transfers between husband and wife are exempt from Inheritance Tax and if the nil-rate band is not used on the first death, this means that the value of the estate on the second death that will be exempt from Inheritance Tax doubles to £650,000. If you are planning to leave your main family home to your children or grandchildren or lineal descendants them from 2020/21 the Residential Nil Rate Band of up to £1750,000 will be available. The effect of this is that if on the death of the first spouse the estate passes to the surviving spouse and then on their death the family home is passed to the children then up to £1,000,000 (comprised of both spouses Nil Rate Bands and Residential Nil Rate Bands) can be inherited free of inheritance tax. 

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4. Prepare an Estate Plan

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The complexity of Inheritance Tax law provides substantial planning opportunities. Effective planning should take into account a number of key principles and possible courses of action to investigate.