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Contact UsA PERSONAL APPROACH TO WILL WRITING & ESTATE PLANNING
ESTATE PLANNING AND ASSET PROTECTION
Inheritance Tax can cost loved ones hundreds of thousands in the event of your death, yet it is possible to legally avoid huge swathes of it, or possibly pay nothing at all.
WHAT IS INHERITANCE TAX?
This is the tax charged on your estate in excess of your inheritance nil rate band, which is currently £325,000. This allowance will presently remain unchanged until 6 April 2021.
Your estate comprises of all the assets that you outrightly own; together with gifts made within the seven years leading up to your death.
Inheritance Tax arising on death is chargeable at 40% and this can be reduced to 36% if certain charitable gifts are left, which must be at least 10% of your total estate.
As well as the above nil rate band, there is an additional allowance in relation to your home, called the residential nil rate band. This is currently £125,000 and increases by £25,000 each year to reach £175,000 in April 2020. The conditions for this are that it is the family home and it is left to your children or grandchildren.
Any surplus of both the nil rate band and the residential nil rate band can be transferred between married couples and civil partners.
WHAT IS ESTATE PLANNING?
Estate planning is an exercise which involves evaluating your current estate; determining who you wish to inherit and formulating a way in which this can be best achieved.
All of this can be combined with an attempt to reduce the overall Inheritance Tax liability.
The end document of this process is a clear and concise Will. This should enable your executors to ensure that your wishes are followed; once probate has been obtained.
This may additionally involve a combination of outright gifts both during your lifetime and in your Will, as well as ensuring clear nominations are made for assets which do not fall into the Inheritance Tax regime.
In addition, consideration should be given to taking out Powers of Attorney which will enable those nominated to act on your behalf during your lifetime at a point when required.
Who Pays Inheritance Tax?
Currently, everyone is allowed to leave an estate valued at up to £325,000 without their beneficiaries paying tax on it. The amount is set by the Government and is called the nil-rate band, because it is the amount you pay a “nil-rate” of Inheritance Tax on.
Above that amount, anything you leave behind is subject to tax of 40% (or 36% if you leave at least 10% of your assets to a charity).
How does being married or not affect me?
If you are married, when you die, any assets left to your spouse or registered civil partner, provided they are UK-domiciled, are exempt from Inheritance Tax. On top of this, your partner’s Inheritance Tax allowance rises by the amount you did not leave to others, meaning together a couple can currently leave £650,000 tax-free.
While transfers of property and other assets between married couples or civil partners do not attract Inheritance Tax, this is not the case for unmarried couples.
If you are not married, but own assets jointly with another person, the situation gets complicated, especially where a residential property is involved. The Inheritance Tax position will depend on whether you and your partner own the property as ‘joint tenants’ or ‘tenants in common’ and whether there is a Will. The need for individual advice is essential so that you can protect your estate and ensure that your wishes are carried out.
Asset Protection – In Particular Property
One in every three women and one in every four men are likely to require long term residential care. Fees in care homes vary considerably but can be in the order of £15,000 to £25,000 each year depending on facilities and the area of the country.
If you have assets valued at over a certain level and require residential care, you are responsible for the costs and the Local Authority may obtain an order enabling the sale of assets, including your home to meet the costs.
To be able to protect the asset, it must be owned as ‘tenants in common’ and each owner leaves their share of this in trust for children or other beneficiaries rather than to the other owner.
This means that the survivor never becomes the sole owner of the asset. This will prevent the Local Authority taking all of the assets into consideration for fees if permanent residential care is required. The most that could be considered is the survivor’s share of the asset.
There are further issues which may arise such as the surviving spouse remarrying and potentially divorcing, which needs to be considered to ensure that your assets are inherited by those you wanted to and not left to chance.