Passing on your wealth

Make sure your loved ones get your hard-earned money and not the taxman

Estate preservation doesn’t only affect the very wealthy. Rising property prices have meant that it’s now an issue for an increasing number of people. So what are the areas you need to consider to protect your wealth?

Write a will
A will is an essential part of your financial planning. Not only does it set out your wishes but if you die without a will your estate will generally be divided according to the rules of intestacy, which may not reflect your wishes.
This can be particularly problematic for unmarried couples, as the surviving partner doesn’t have any automatic rights to inherit, but it can also create problems for married couples and civil partners.

Married couples or civil partners inherit under the rules of intestacy only if they are actually married or in a registered civil partnership at the time of death. So if you are divorced or if your civil partnership has been legally ended, you can’t inherit under the rules of intestacy. But partners who separated informally can still inherit under the rules of intestacy.

Inheritance tax
While a will helps to ensure that your estate is distributed according to your wishes, the inheritance tax (IHT) rules mean that one of your beneficiaries could be the taxman.

Your estate is made up of everything you own minus any debts such as mortgages, loans and your funeral expenses. If the value of your estate exceeds the IHT nil rate band (currently £325,000), the surplus will be taxed at 40 per cent. An extra rule applies to married couples and registered civil partners. The transferable nil rate band means that the surviving spouse or partner can use any of their partner’s unused nil rate band (NRB).

Minimising your inheritance tax liability
Having paid tax throughout our lives, few of us want to leave the taxman more when we die and there are a number of ways to reduce the potential amount that will need to be handed over.

Giving away your estate can be an effective way to reduce a future IHT liability.

Exempt Transfers: these are gifts where IHT will never be payable.

Potentially Exempt Transfers: these can become exempt from IHT if you survive for seven years from when you make the gift.

Chargeable Lifetime Transfers: these may incur an immediate IHT charge of 20 per cent. Further IHT may be payable if you die within seven years of making the gift.

To avoid making a Gift with Reservation, which will not reduce your estate for IHT, you must give away the asset you are gifting completely.

Sometimes giving money outright might not be the best solution. For instance, you might want to give money to a child but be worried about how they might spend it, or you might want to leave some money for grandchildren but do not yet know how many you’ll have.

In these situations, a trust can be a good option. Trusts may allow you to reduce the value of your estate but retain some control over who receives the gift and when. This is a very complex area, so it is important to seek professional advice when considering this option.

If it is likely that IHT will be payable on your estate, a whole-of-life policy written under an appropriate trust can be used to ensure that funds are available to pay all or some of any future IHT bill.

Provided you pay the premiums, the proceeds of the policy will be paid to your estate when you die. It is vital to have the policy written under an appropriate trust to ensure that the money paid out by the policy is outside your estate. This ensures that the money can be used to settle the IHT tax bill rather than add to it.

In certain situations, a lump sum may be payable from a pension plan when the member dies. Depending on the scheme rules, it may be possible for the member to nominate an individual or a trust to receive this lump sum and to make this payment tax-efficient. ν

All figures relate to the 2012/13 tax year. The Financial Services Authority does not regulate estate planning, wills or trusts.

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