What is estate planning?
Estate planning is when you set out all your assets and decide who you would like these to go to when you pass away. It’s a way for you to provide instructions on how your belongings should be distributed, while taking into account inheritance tax payable, legal fees and any other costs.
Some of the assets you might consider when estate planning include:
- Pensions
- Personal belongings
- Property
- Savings
- Shares or investments
- Vehicles
- Your business
This can make things much easier for your loved ones, as they’ll have a clear plan to follow when you’re gone. When people die without an estate plan or a Will in place, it can lead to family disputes and costly legal battles. So it’s best to avoid this if you can.
What is inheritance tax?
Inheritance tax is usually paid on your estate – including your money, possessions and any shares you hold – when you pass away. It will also need to be paid on gifts or trusts that are made in the seven years before your death.
This can all sound quite morbid. But it is important to think about, as the amount of inheritance tax applied will ultimately determine what your beneficiaries – such as children or grandchildren – receive from your estate.
How is inheritance tax calculated?
The total value of your estate will have a large impact on the amount of inheritance tax your executors pay. If your estate is worth more than £325,000, inheritance tax will be applied to anything over this amount.
For instance, if your estate is valued at £400,000, tax will apply to the £75,000 above the threshold. The standard inheritance tax rate is 40%, so in this example £30,000 would be taken out of your estate (40% of £75,000).
It’s worth noting that if you leave more than 10% of your estate to charity, the inheritance rate will be reduced to 36%. This might not sound like much, but it could make a significant difference to the final inheritance tax bill.
Do I have to pay inheritance tax?
Although many people wish they could, you can’t avoid inheritance tax completely. But even if your estate is over the threshold, there are certain circumstances where you can pass on assets tax-free. Some examples include:
- Spouse or civil partner exemptions
Inheritance tax is applied differently for married couples. This means that anything you leave your spouse or civil partner will not be taxed, as long as you both live in the UK. You can also give your spouse or civil partner tax-free gifts while you’re alive, even if they’re over the threshold. - Charity donations
We’ve already mentioned that leaving a gift to charity can reduce the amount of inheritance tax you pay on your whole estate. But when it comes to the gift itself, there will be no tax at all. So your chosen charity will receive your donation in its full amount. - Annual exemptions
You’re entitled to give away up to £3,000 each tax year. This may take the form of a single gift or multiple presents that add up to this value. - Property allowances
Your tax-free threshold could increase from £325,000 to £500,000 if you leave your property to a child or grandchild. This means you won’t need to pay tax on anything under £500k – your total estate will need to be worth less than £2 million for this to apply, though. - Small gifts to friends and family
You can give away small, tax-free sums up to £250 to as many people as you’d like while you’re alive. Gifts to someone who is getting married or entering a civil partnership will also be tax-free, up to the value of £1,000 (or £5,000 if you’re their parent).
We understand the rules around inheritance tax can be confusing. But part of a solicitor’s role is to help you plan your estate in a way that reduces your tax burden. So you’ll have the reassurance of knowing your loved ones will benefit as much as possible from your estate when you’re gone.
Our Wills, estates and probate solicitors are specialists in this area. They can help you navigate the process of estate planning so you won’t be going through it alone.
