Planning what you want to happen to your estate after you are gone is an important part of the financial planning process, particularly if you have dependants you would like to benefit from an inheritance.
One of the biggest things people worry about is how to maximise inheritance and minimise tax, and with good reason, £5.32bn was paid to HMRC in inheritance tax (IHT) in 2020/2021.
Working with a financial adviser can help you to avoid some common pitfalls and maximise the amount of your estate that you leave to your loved ones, but here are some tips for things to think about:
- The most important thing you should do when estate planning is to make a will. Making a will is the only way to be sure that your assets will be shared out exactly as you want them to be. The way you divide your assets can influence the amount of inheritance tax your dependants pay so it’s worth enlisting the help of a financial adviser before you set your plans out in your will.
- Make sure you find out what the income tax threshold is and split your assets accordingly. In this tax year 2021/22 the IHT nil band is £325,000, this is transferable to your spouse meaning that the amount a couple could pass on without paying IHT is up to £650,000. A few years ago a main residence band was brought in which means an individual can pass on up to £175,000 per person of the proceeds from the sale of their main property and can be added to the £325,000 IHT nil band. A couple can potentially then pass on almost £1 million without paying inheritance tax.
- Think about putting your assets in a trust. Putting your money, property or investments into a trust means it will no longer be classed as part of your estate for inheritance tax – as long as your spouse or dependants are unable to benefit. For example, you could do something like establish a trust fund for your grandchildren’s education, or to help them buy their first home. Trust funds can be complicated though, so its worth speaking to a financial adviser to make sure that this is the right thing to do for your personal circumstances.
- You can give some money to your family, and as long as you don’t die within seven years it won’t be counted when calculating any inheritance tax liability. You can give up to a certain amount per year (currently £3,000). It’s worth knowing though that certain assets might attract capital gains charges, so again it’s worth getting advice from a professional.
- As well as taking out a life insurance policy to cover any outstanding mortgage or expenses your dependants may have, you could consider taking one out to cover your IHT bill. Just make sure that you put this policy into trust so that it doesn’t make your IHT bill any bigger.
- Leaving money to charity could also benefit you. As well as feeding your soul, leaving more than 10% of your estate to charity means that the donation will be taken from your taxable estate and could reduce your tax rate.
The ideas above are all worth exploring as ways of maximising the amount your loved ones can inherit once you are gone. At Amethyst IFA we would be more than happy to help you work out the best way to ensure your legacy so don’t hesitate to get in touch.
Please note that this blog is for information only and is not to be taken as financial advice. Its always wise to consult with a professional financial adviser before making any big decisions about your personal finances. Investments can fluctuate and you may get back less than you invested.
