Financial Matters
With David Frederick FCCA | Marcus Bishop Associates | marcus-bishop.com
Three Steps to Take Charge of Your Estate Taxpayers are drifting into the web of inheritance tax (IHT) as the IHT threshold remains unchanged at £325,000. As such taxpayers may want to consider three basic estate planning tools to retain more of their wealth for their loved ones.
Making a Will A will is a key tool that should be in every adult’s estate planning toolbox. However, research shows that less than 50% of UK adults have written a will. This is despite the growth of blended and cohabiting families. A commonly held misconception is there’s no point making a will if you’re married or in a civil partnership as your surviving spouse/civil partner will get everything anyway. This is not necessarily the case, particularly if you have children and hold joint assets with other individuals. The absence of a legally-valid will at death leaves your estate subject to distribution according to intestacy rules and not with your preferred wishes. This may result in HMRC receiving a greater share of your estate. Is this what you really want? Pre-planning will therefore result in your estate being distributed according to your wishes and much less being consumed by the clutches of inheritance tax, which currently sits at 40%. In its most basic form, a will is a legal document setting out your wishes on death. This includes your choice of executors, who will carry out your wishes; names of guardians if you have any children under 18; funeral wishes; and the named beneficiaries of your estate. A valid will requires that you have capacity to make a will and two people who are not beneficiaries and are aged over 18 to witness your signing of it.
Trusts Placing assets in a trust is one of the simplest ways to protect your estate. Assets placed into a trust fall outside of your estate when you die. However, before rushing out to place assets into trusts, taxpayers should be mindful and seek professional advice. Why? Trusts may incur a tax charge at set-up 22 | SE21 - November 2021
stage; periodically and at winding up stage. This is wholly separate from the annual accounting and reporting of trusts to HMRC. If that is not sufficient, trusts are now required to be registered on the Trust Registration Service. Setting up a trust involves appointing trustees, and this is a decision that requires careful thought by any taxpayer seeking to create a trust. Trustees are responsible for managing trusts and the distribution of funds to the beneficiaries in accordance with the terms of the trust. Trusts are an effective tool for passing on intergenerational wealth.
Gifting Assets Over Time At present every taxpayer has an annual £3,000 gift exemption that they may use without this being added to their estate. The good news is that if it is not used this year it may be combined with next year’s £3,000 allowance. Gifting gets better, if you’re a married couple or in a civil partnership and neither of you used your exemption in 2020-21, you can give £12,000 away in 2021-22. The money immediately sits outside of your estate for inheritance tax purposes, so it can be an effective way to reduce your estate’s value over time. Smaller gifts of up to £250 per annum may be given to individuals of your choice. In addition wedding gifts may be given to certain relatives; or you may leave 10% or more of your net estate to a charity, which might make you eligible for a reduced inheritance tax rate of 36%. All gifts require that you survive seven years from the date of the gift and you do not retain any benefit from any gifts made. Should you die within seven years of making a gift, it will be taxed on a sliding scale known as taper relief.
