Strategies and solutions

Bringing significant peace of mind as you age

Getting your affairs in order for when you pass away can bring significant peace of mind as you age. Failing to protect family wealth from Inheritance Tax as part of an estate plan could cost families considerably, but there are various strategies and solutions to avoid or mitigate this tax legally.

While some individuals may choose to spend their wealth, others aim to pass on the wealth they have diligently accumulated. For these individuals, managing any Inheritance Tax liability is crucial, ensuring the money they leave behind reaches the intended beneficiaries at the right time.

Preserving and protecting your assets
Whether your wealth was earned, inherited or accrued through savvy investments, your aim should be to legally minimise the portion that ends up with the tax authorities, ensuring it can be enjoyed by you, your family and your intended beneficiaries.

Without proper provisions to preserve and protect your assets, your family might face significant challenges and expenses in managing your estate. This highlights the importance of having measures in place to avoid such predicaments.

Essential role of estate planning
Estate planning is a pivotal aspect of financial planning, irrespective of the wealth one has accumulated. It allows you to dictate the future of your assets, ensuring your loved ones are cared for and that your assets are transferred efficiently, minimising Inheritance Tax liabilities.

This planning process can get complex. It involves creating a detailed plan for distributing your wealth and property posthumously, ensuring your assets are transferred according to your wishes.

Formulating a clear and effective plan
Developing a clear plan for your estate involves specifying how your assets should be distributed and ensuring all necessary documentation is in place to seamlessly transfer these assets.

Your estate comprises everything you own: savings, investments, certain pensions, property, life insurance (not held in trust) and personal possessions. Any debts and liabilities are deducted from the total value of these assets, outlining what needs to be considered when devising an effective plan for the future.

Priority of writing a Will
Creating a Will should be paramount in any Inheritance Tax Planning strategy. An up-to-date and legally binding Will ensures your estate is managed according to your wishes and helps solidify your Inheritance Tax position, potentially saving
you money.

Without a Will, the risk of your assets being distributed by the state under intestacy rules increases – a scenario that likely won’t align with your wishes or offer any tax benefits to the recipients. These rules dictate the distribution of your estate, potentially leading to undesirable outcomes and complications regarding who manages your financial affairs after death.

Crafting a Lasting Power of Attorney
The creation of a Lasting Power of Attorney (LPA) for Property, and, Financial Affairs, and Health and Welfare is an essential step that individuals should consider regardless of their age. It is a proactive measure to ensure that your affairs are managed according to your preferences.

An LPA provides clarity on who is authorised to make decisions on your behalf regarding your property, finances, health and welfare. It allows you to specify any constraints or directions, ensuring that your wishes are adhered to even if you can no longer express them yourself.

Strategic Inheritance Tax planning
After establishing a Will and an LPA, it is crucial to proceed with Inheritance Tax planning. The demise of an individual prompts an evaluation of their estate for Inheritance Tax liabilities. For UK domiciles, this includes all personal assets, property and certain trusts.

The imposition of Inheritance Tax occurs at 40% on the portion of the estate exceeding the ‘nil-rate band’ (NRB) threshold. This threshold delineates the value of the estate that is exempt from UK Inheritance Tax, currently fixed at £325,000 until at least 5 April 2028.

Residence nil rate band offers additional relief
Furthermore, the introduction of the ‘residence nil rate band’ (RNRB) on 6 April 2017 offers additional relief for estates passing their primary residence to direct descendants, enhancing the tax efficiency of the estate. For the tax year 2024/25, the RNRB is valued at £175,000, which can be reduced for estates over £2 million pounds.

Estate preservation planning extends beyond the mere allocation of assets post-mortem. It encompasses a comprehensive review of one’s current financial landscape and the strategic utilisation of assets during one’s lifetime. Gifting assets to the next generations allows the benefactor to witness their assets being enjoyed and can significantly mitigate future Inheritance Tax obligations.

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