If you want to protect your family’s financial future, you’ll need to draw up a substantial estate plan.
Estate planning in the UK is important to get right, as it plays a vital role in your long-term tax strategy. In this guide, we explain how you can minimise your inheritance tax bill and make things smoother for your loved ones by carefully managing your wealth and assets today.
Here’s what you need to know about creating a watertight estate strategy.
Estate planning in the UK: Essential steps
At its core, estate planning ensures your assets are distributed according to your wishes after you pass away and minimises the inheritance tax due on your estate. A solid estate plan will give you more control over your assets, helping you pass on your wealth in a tax-efficient way and reducing unnecessary stress for your loved ones.
Knowing the value of your estate
Before you can start your estate plan, you’ll need to create a list of every asset you own, including property, investments, savings and personal possessions. This inventory can help you understand the true value of your estate.
You should also include any outstanding debts and consider how your estate may rise or fall in value over time.
Understanding inheritance tax
Familiarising yourself with inheritance tax rules can help you develop a robust estate strategy.
Inheritance tax is typically charged at a standard 40% rate. If the value of your estate is less than £325,000, there will be no inheritance tax payable when you pass away. This is also known as your tax-free nil band.
You may also be able to raise your tax-free threshold to £500,000 by leaving your primary residence to your children or grandchildren.
Any wealth or assets that you leave to your spouse or civil partner will also be free from inheritance tax. Furthermore, if one partner dies without using their full tax-free allowance, the remainder will automatically pass to the surviving spouse.
Giving gifts
Giving gifts to individuals and charities while you’re still alive can also help minimise your inheritance tax bill.
Firstly, you need to understand the seven-year rule:
- Gifts provided less than three years before your death will count towards the value of your estate and may be subject to inheritance tax at the standard 40% rate.
- Gifts provided between four and seven years before your death will be taxed according to ‘tapered relief’.
- Gifts provided more than seven years before your death will not count towards the value of your estate and no inheritance tax will be payable. However, the rules can vary if the gift is part of a trust.
Annual exemption
Each tax year, individuals can give away gifts worth up to £3,000 completely free from inheritance tax.
With the end of the 2023/24 tax year around the corner, we’d recommend checking whether you have used your full annual exemption amount before April.
Other tax-free gifts
Gifts to charity are typically free from inheritance tax. Furthermore, you can give a tax-free gift to couples getting married or entering a civil partnership every tax year. The maximum value of this gift will depend on your relationship with the recipients:
- your children: up to £5,000
- your grandchildren and great-grandchildren: up to £2,500
- other individuals: up to £1,000.
Writing your will
Writing a will is a crucial step in your estate plan, as this document ensures that your estate is distributed according to your wishes instead of the rules of intestacy. Your will should account for all your assets, name trustworthy executors and identify your chosen beneficiaries.
Depending on your circumstances, you may choose to give to charity in your will. In the UK, leaving at least 10% of your taxable estate to charity will reduce your inheritance tax rate from 40% to 36%.
There are several types of will to choose from when estate planning in the UK, including:
- Single wills are typically for individuals who wish to decide their own circumstances. You do not need to be single to use this type of will.
- Mirror wills are largely identical wills for couples who have similar wishes and beneficiaries.
- Trust wills often offer greater financial protection for the writer and their beneficiaries, making them effective estate planning tools.
The most tax-efficient approach will depend on your unique financial goals and circumstances. At Thomas Barrie & Co., we can help ensure that your wishes are carried out by helping you draft your will and reviewing it regularly.
Trusts
Trusts can give you greater control over how your assets are distributed and used after your death, making them instrumental in creating a robust estate strategy.
There are many advantages to setting up a trust. Firstly, assets held in a trust are generally considered ‘outside’ your estate. As a result, the right approach could help you minimise your inheritance tax bill.
However, setting up a trust isn’t just about saving money; it can also make it easier and quicker for trustees to access funds. Furthermore, trusts often offer more protection if you want to leave assets to vulnerable or underage family members.
Find your estate planning solution today
Estate planning in the UK can be complicated, so you should always seek expert advice before writing a will, establishing a trust or setting your strategy in stone.
Read about how our estate planning services can help you pass your wealth on in a tax-efficient way.