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7 Important Things You Must Do Right Now To Protect Your Family’s Future

You have worked hard throughout your life, building your wealth. Along with many people, the Covid-19 pandemic will have focused your mind on your mortality and made you all the more anxious to ensure that your financial affairs are in order and that your assets will pass to your loved ones on your death.

However, unless you take some key steps and plan ahead, it is possible that a good chunk of your assets could go to HMRC on your death, rather than to your family.

In 2019/20, £5.2 billion was paid in Inheritance Tax (IHT). The expectation is that figure will increase each year as more people become liable for IHT because of increasing property values and a long period of investment growth.

The recent announcement by the chancellor that the IHT threshold is to be frozen at £325,000 for the next five years also means a likely increase in the number of estates paying IHT. It’s estimated that freezing the allowance will bring in an extra £985 million for HMRC. Expectations are that an extra 11,000 estates will be impacted each year by 2026.

So, it is important that you are aware of IHT, how much your estate is worth, and what this might mean for your heirs when you pass away.

You should then work through a series of estate planning steps to ensure that your assets will pass to those you want them to, in the most secure and tax-efficient way. Using a professional will help you to navigate around the rules, as well as ensure you avoid costly mistakes.

In this guide you will find seven things you must do now to protect your family’s future. You can click the ‘Download’ button to get a full, free copy of the guide, or read the key points below.

Next steps

We are a family run firm of professional estate planners and specialise in helping families protect and pass on their wealth to the next generation. To find out more, please get in touch on 01708 923 303 or by emailing enquiries@strathmorewills.co.uk.

1. Make A Will And Keep It Up To Date

The pandemic demonstrates how easily something completely unexpected can impact on our daily lives and threaten our health and well-being.

The pandemic will have made many people consider what will happen to their assets when they pass away. By making a Will, you can ensure that your wealth will pass to the people you want it to, yet more than half the UK population do not currently have a Will in place and will therefore pass away intestate.

The rules when someone passes away intestate are strict, and will usually mean that only spouses, partners, and close family will inherit.

If you consider the implications of your family having no say over the distribution of your assets on your death, you will realise how concerning and turbulent this will be – especially at a time when they are already likely to be very emotional and stressed.

There will be an extra layer of stress, and potential areas for conflict, if you have been previously divorced, and do not have a Will in place that clearly outlines the distribution of your assets. It is easy to envisage circumstances in which competing claims have to be settled in a court of law, with all the expense and acrimony that could entail.

You can easily avoid all that potential conflict if you have a valid and up to date Will in place. This will mean that your executors are able to distribute your assets in clear accordance with your wishes, and in a timely manner.

If you are married or in a civil partnership your spouse or partner should make a Will too.

Key takeaway – Making a Will is the only way to ensure your assets are distributed in accordance with your wishes after your death. It is an essential part of your life planning and should be a top priority for everyone.

2. Set Up A Lasting Power Of Attorney

As well as putting arrangements in place regarding what happens to your assets after your death, you should also take steps to ensure your financial affairs are managed in accordance with your wishes if you’re incapacitated and unable to make decisions yourself.

You can do this by setting up a Lasting Power of Attorney (LPA). This means that you appoint someone, or a group of people, to manage your financial affairs if you become unable to.

Whoever you appoint will be able to make financial decisions on matters such paying your bills, managing your bank accounts, deciding what investments to make and the buying and selling of your property and other assets. If you own a business, they will also be able to manage this on your behalf and ensure it continues.

You can also set up a Health and Welfare LPA, which enables you to appoint someone to make decisions on your behalf specifically related to health and welfare matters.

An experienced Estate Planner will be able to advise you on the best type of LPA to set up, and so ensure the effective management of your financial affairs by your appointees in accordance with your wishes in the event of you being incapacitated.

Key takeaway – A Lasting Power of Attorney ensures that those you trust carry out your wishes when you are unable to manage your financial affairs.

3. Use Trusts

Trusts can be an effective way to distribute wealth to your chosen beneficiaries and help reduce the value of your estate that will be liable for IHT.

A Trust is a legal document where property or other assets pass from yourself to a trustee, who then manages the assets on behalf of the ultimate beneficiary.

There are many different types of Trust. An experienced Estate Planner will have access to a range of Trusts for different circumstances and to cover all eventualities. They will help you choose the most appropriate solutions and create a framework that helps you achieve your wealth-planning goals.

Setting Up A Trust

When setting up the Trust at the outset, you will be able to set out the details of how the trustees should manage the assets.

For example, setting up a Trust is often a sensible way of passing on money to children or grandchildren if you think they are too young to spend it wisely.

You can then specify in the Trust how you want the assets to be granted – maybe at a certain age when they can make good decisions over how to use the money.

You could also decide that you want the money in the Trust used for certain purposes, such as for school or university fees, buying property, setting up a business or for any other milestone you wish. The trustees will then follow the terms of the trust after your death.

Trusts For Existing Assets

One key financial instrument often overlooked when it comes to IHT liability is the value of life cover paid out on your death.

Mortgage term assurance and death in service benefit through any pension scheme will add value to your estate on death so could be subject to IHT.

You should therefore ensure you have suitable Trusts in place on each.

Key takeaway – Trusts can be an effective way to manage your financial affairs and potentially reduce IHT, but setting them up can be complicated, so expert advice from an experienced estate planner is essential.

4. Understand How IHT works

Understanding how IHT works, and how it can impact on the amount of tax your heirs could pay on your death, can give you a useful insight when it comes to financial planning. It can also help
you structure your financial affairs effectively and therefore reduce the amount of IHT payable on your death.

In simple terms, your beneficiaries will pay IHT at a rate of 40% on the value of your estate above the applicable nil-rate band (NRB).

The current NRB is £325,000. On top of that each person has a residence nil-rate band (RNRB) which is currently £175,000. Note that, in order to use the RNRB, the property must be passed to direct descendants such as children or grandchildren.

Example 1:

In this simple example, a single person has died. They had no spouse or partner, but the value of their estate included a property worth £200,000.

Total gross value of estate£900,000
Less NRB-£325,000
Less RNRB-£175,000
Value of estate above IHT NRB£400,000
IHT payable – 40% of £400,000£160,000
Net value of estate after tax£740,000

Therefore, the total amount of IHT payable on their death was £160,000.

If you are married, or in a civil partnership, the value of your estate on the death of either you or your spouse or partner will automatically pass to the surviving partner with no IHT being payable. You can also use each other’s unused allowance in the future.

Effectively, this means your children could currently inherit up to £1 million (£500,000 each) without paying IHT.

Example 2

In this second example, a widow has died, four years after the death of her husband.

Total gross value of estate£1,500,000
Less NRB (£325,000 x2)-£650,000
Less RNRB (£175,000 x2)-£350,000
Value of estate above IHT NRB£500,000
IHT payable – 40% of £500,000£200,000
Net value of estate after tax£1,300,000

As you can see, the husband’s nil-rate band and nil- rate residence band were both used, which reduced the IHT liability by £500,000.

Key takeaway – Knowing how IHT is calculated will help you realise how it could impact on the value of your estate that passes to your beneficiaries on death.

5. Make Use Of Gifts

You can help reduce the amount of IHT payable when you pass away by gifting some of your assets while you are still alive.

Tapering

Tapering relief can help mitigate the effects of the “seven-year rule” on IHT being payable on gifts.

The full rate of 40% IHT is payable if you pass away during the first three years after making the gift, but it then tapers down year-on-year.

As a rough rule of thumb, your beneficiaries will not pay IHT on the value of the gift if you live for seven years after the date of making the gift.

Gift Exemptions

There are various exemptions that you can make use of. For example, everyone can gift £3,000 each year and this amount will immediately fall outside the value of your estate. You can also make exempt gifts for weddings or civil ceremonies and payments towards living costs of an elderly relative.

You can give small gifts of up to £250 per person during the tax year, as long as the person has not benefitted from any other exemptions during the year.

Gifts to charities and political parties are also exempt from IHT.

Years between gift and deathIHT rate applicable
1-340%
432%
524%
616%
78%

Make Gifts Out Of Income

If you make a gift out of your regular income and it satisfies various conditions, then it is immediately exempt from IHT.

There are three key criteria:

  • Gifts out of income should form a regular pattern of payments, rather than one-off events.
  • You must retain sufficient level of income after making the gift for a reasonable standard of living.
  • You must demonstrate that the gifts are made from actual income, rather than drawn from your accrued capital.

Key takeaway – Gifting your assets to family members is an effective way of reducing your IHT liability. But there are strict criteria that you should follow closely, and you should get guidance from an experienced Estate Planner to ensure you set up the arrangements correctly.

6. Protect Your Business

If you are a business owner, protecting your business in the event of your death should be an essential part of your estate planning considerations.

You will have put in a lot of time and effort into growing and nurturing your business, and it’s likely that part of your motivation will have been the thought of being able to pass it on to your children or grandchildren on your death.

But if you do not take the necessary steps to protect your business, the total value of it – including business property and all assets – could well fall within the value of your estate and leave your heirs with a large IHT bill payable. This could even lead to your business having to be sold to ensure the bill can be paid.

So, it is important to ensure there are effective plans in place to protect your business in the event of your death.

The Importance Of A Succession Plan

The best way to protect your business is by making sure you have an up-to-date Will in place that clearly outlines how you want your business distributed.

As with your other financial assets, this can prevent any legal claims on your business such as creditors and any divorced spouse.

You will want to ensure that plans are in place regarding issues such as the running of the business and distribution of your shares.

An effective succession plan can mean that the business will continue to operate effectively and successfully in the event of your death.

Business Relief Can Help Reduce IHT Liability

Using Business Relief reduces the amount of IHT payable on the transfer of qualifying business assets. For some assets, the reduction is 100%, which means the asset is effectively exempt from IHT.

You can get a reduced rate of 50% relief on the land, buildings or machinery owned by your business. This is particularly important as those are likely to form a big percentage of the overall value of the business.

You can also get 100% relief on a business or interest in a business, as well as shares in an unlisted company.

In all cases, you need to have owned the business for a minimum of two years before applications for Business Relief are valid.

You should be aware that there are exceptions and separate rules for various types of business in different sectors, so getting advice from a specialist estate planner when you are drawing up your business succession plans is essential.

Key takeaway – If you own a business you should take the necessary steps to ensure your family gets to make the decision about what to it on your death, rather than HMRC.

You should also ensure you have a succession plan reflected in your Will and other financial arrangements.

7. Speak To An Estate Planning Expert

It’s not always straightforward to manage your financial affairs and ensure your family get more of your wealth than HMRC do when you pass away.

We would therefore strongly recommend that you work with an Estate Planner, who is experienced in this kind of tax and financial planning.

They will be able to help you put a robust plan together, and regularly review it to ensure it still fits your needs. They will then suggest any modifications, particularly as your financial circumstances change.

Having a robust plan in place will ensure that as much of your accrued wealth as possible passes to your intended beneficiaries when you pass away.

How Strathmore Wills & Estate Planning Can Help

Wills and Estate Planning is our core area of speciality. Helping families protect their wealth and create certainty for their family and for future generations is what we are truly passionate about.

We can help you achieve the peace of mind that comes with correctly organising your inheritance affairs, while also helping you to protect your hard-earned wealth for the next generation.

To find out more about our services or talk through your own situation, please get in touch.

Why Choose Strathmore Wills & Estate Planning?

Professional Advice

You will receive expert guidance and professional advice from our consultants.

Wealth Preservation

Your documents will be prepared by our London based legal partners ensuring that every legal document is correctly drafted, reviewed and fully signed off by our appointed lawyers.

Ongoing Relationship

You will be advised and kept fully up to date with any changes that may affect your planning in the future. We believe in keeping you fully informed and offer all clients continued support.