Wealth preservation and transfer has become an important issue for many families today.

If you have spent years building up your personal wealth, you will want the comfort of knowing that upon your death as much of your estate as possible will pass into the hands of your chosen beneficiaries.

The issue doesn’t only affect the very wealthy. Inheritance Tax (IHT) and legacy planning are becoming more of an issue for many of us due to rising house prices and more complex family situations.

Making provision for your loved ones is an essential part of managing your estate, and we should all prepare for the eventual transfer of our assets, regardless of any tax or legal consequences.

As soon as you begin to build your wealth, you need to make sure that you have structured the ownership correctly to minimise the risk of loss where you can. You should also consider insurance protection and putting Powers of Attorney in place in case something unexpected happens to you.

Understanding the value of your estate

When you pass away, the value of your estate consists of everything you own – this can include savings, investments, pensions (although often your pension won’t form part of your estate), property, life insurance (if not written in an appropriate trust) and personal possessions. The value of any gifts made in the seven years before death, such as cash or items of value, will also need to be added back into your estate.

Outstanding debts and funeral expenses can be deducted from the value of your estate. IHT is payable if the value of your estate exceeds the ‘nil-rate band’ – currently £325,000.

Interest in the family home

An additional ‘residence nil-rate band’ (RNRB) allowance is available if you leave your interest in the family home to direct descendants such as children, stepchildren and/or grandchildren. This can apply to any individual property that has been your main residence at some time.

For the current tax year, the maximum RNRB additional allowance is £175,000, potentially increasing your total IHT allowance to £500,000 (or £1,000,000 for a married couple).

What will happen to your estate when you’re gone?

Have you considered what will happen to your estate when you die?

Estate preservation planning can ensure that your affairs are in order and that your loved ones are provided for after you are gone. This is important for everyone but may be especially important for those who have complex or significant amounts of assets, allowing for a much smoother and less stressful transfer of your wealth to your beneficiaries when you die.

Ways preserve your estate and mitigate the amount of IHT you may have to pay include:

Making a Will

A Will enables you to specify who you want your assets to go to.

If you do not have a Will in place, your assets may be distributed according to the laws of intestacy – which could mean that your assets do not go to the people that you want them to and you may not be making the most of the IHT exemption that exists if you wish your estate to pass to your spouse or registered civil partner.

You should also be aware that if you are not married or in a civil partnership, your partner will not automatically inherit your assets upon your death, so you will need a Will to explicitly state your wishes. Dying intestate, or without a Will, may mean that relatives other than your spouse or registered civil partner are entitled to a share of your estate, which may trigger an IHT liability.

Don’t leave this planning until it is too late. Create a Will as soon as you have assets and/or dependants, and review it regularly, particularly if your circumstances change, such as on marriage, divorce or having children.

Making lifetime gifts

Non-exempt gifts made more than seven years before the donor dies are free of IHT, so, it might be appropriate to pass on some of your wealth while you are still alive. This will reduce the value of your estate when it is assessed for IHT purposes.

You can gift as much as you wish to other individuals or bare trusts with no immediate IHT issue. This type of gift is known as a ‘Potentially Exempt Transfer’ (PET). If you live for seven years after making such a gift, then it will be exempt from IHT, but should you be unfortunate enough to die within seven years, then it will still be counted as part of your estate. It’s also important to note that PETs must meet certain conditions and are subject to exemptions. For example, you can only gift to another individual or into some trusts (not all gifts to Trusts are considered as PETs), so a gift cannot be made to or from a company.

Gifts such as transfers into discretionary trusts are known as Chargeable Lifetime Transfers (CLT). A CLT is a gift made during an individual’s lifetime which is immediately chargeable to IHT. This does not necessarily mean that there will be IHT to pay, but it does have to be assessed to see if a charge to IHT will arise. If the amount gifted is within the available nil-rate band, then there will be no IHT due immediately. CLTs are cumulative, and CLTs made in the previous 7 years prior to the current CLT will reduce the amount of nil-rate band available.

You need to be careful if you are giving away your home to your children with conditions attached to it, or if you give it away but continue to benefit from it. This is known as a ‘Gift with Reservation of Benefit’ and isn’t effective for IHT purposes.

Leaving money to charity

Being generous to your favourite charity can reduce your tax bill. As well as the gift itself being exempt from IHT, if you leave at least 10% of your net estate to a charity or number of charities, then your IHT liability on the taxable portion of the estate is reduced to 36% rather than 40%.

Setting up a trust

As part of your IHT planning, you may want to consider putting assets in trust – either during your lifetime or under the terms of your Will. Putting assets in trust – rather than making a direct gift to a beneficiary – is a method for exercising some level of control around when the assets can be accessed or how they can be distributed or used.

Family trusts can be useful as a way of reducing IHT, making provision for your children and spouse, and potentially protecting family businesses. Trusts enable the donor to control who benefits (the beneficiaries) and under what circumstances, sometimes long after the donor’s death.

Compare this with making a direct gift (for example, to a child), which offers no control to the donor once given.

When you set up a trust, it is a legal arrangement, and you will need to appoint ‘trustees’ who are responsible for holding and managing the assets. Trustees have a responsibility to manage the trust on behalf of and in the best interest of the beneficiaries, in accordance with the trust terms.

Ensuring your wealth is passed on in the most tax-efficient way and to your chosen beneficiaries can be a complex process. Seeking advice from a certified Wealth Planner can help to ensure this happens in the right way and according to your wishes.

Please note:

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate advice on taxation, Trusts, Estate Planning, Will writing and certain aspects of corporate services.

The content was accurate at the time of writing, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.

This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.

FP2024-402 - Last updated September 2024