Most people do not want to think about their own death and are often put off planning for death for this reason. However, early planning is essential to reduce inheritance tax (IHT) for beneficiaries and to ensure that the person’s assets go to the people they want to inherit them.
This piece has been put together to help you understand the key points of planning for inheritance tax, making a will and dying intestate.
A mind map highlighting the key questions you need to consider when planning for IHT on death:
Key points to consider on making a will:
- Are you married or in a civil partnership?
- If married or in a civil partnership have you been married or in a civil partnership before?
(If your spouse or civil partner dies, any unused nil-rate band can be transferred to their estate.)
- Are you co-habiting?
(An unmarried cohabitee has no automatic right to inherit anything from their partner so making a will is vital. A cohabitee is not entitled to the spouse or civil partner exemption.)
- Do you have any children?
(The children can inherit directly from your estate or you may consider setting up a trust. They will need to provide names and addresses of guardians for any infant children (under 18)
- Do you wish to leave specific monetary bequests or bequests of property? (including gifts to charity)
(If you give 10% or more of your net estate to charity, the IHT on the remainder falls to 36%. You will need to provide the amount, identify the property and the name and address of each beneficiary.)
- Will there be any residue?
(The residue is the rest of the estate after specific bequests. Identify the beneficiaries, at what age they should inherit and substitute beneficiaries if they die before you.)
- Have they made any gifts in the last 7 years?
(Outright gifts are potentially exempt transfers which become free of IHT if they live for 7 years after making them. Gifts up to the annual exemption of £3,000 per year free of IHT.)
- Does any property qualify for business property or agricultural property relief?
(Relief at 100% or 50% may be available depending on the type of property.)
- Do you have life assurance?
(Life assurance pay-outs normally form part of the estate, so are subject to IHT. Consider arranging life assurance to pay into a trust, which will place it outside the estate and make the payment free of IHT.)
Key points with regard to dying intestate:
If a person dies without making a will their estate is divided according to the intestacy rules.
If the deceased made a will but the will did not effectively dispose of all their estate this is a partial intestacy. The property that was not disposed of by the will passes under the rules of intestacy.
If you are based in Scotland, it is important to be clear that the intestacy rules are different.
It can be a mind field when planning IHT but the earlier you plan for the financial impact of death, the less pain and confusion for your family. Planning will allow your family to enjoy your lifetime’s achievement whilst taking into account current and anticipated future needs.
Before tackling this issue yourself, speak to an advisor, establish what assets you own and how they will be treated for IHT purposes especially if you are thinking about gifting them. Most gifts are potentially exempt transfers (PETs), some gifts are exempt from IHT and some gifts attract relief from IHT. The main reliefs are business property relief, agricultural property relief, woodlands relief and the relief for heritage assets. Rules apply to prevent abuse of the IHT system; for example, the reservation of benefit rules and the pre-owned assets rules. Knowing the extent to which an asset is liable to IHT will help know the best course of action to take.
In fact talking to an advisor might raise the question of IHT planning is appropriate. Life insurance policies and/or trusts could be better suited for you.
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