Estate preservation is important at all ages of life. As soon as you start to begin to build your wealth, you need to make sure you have structured 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.

An essential part of managing your estate and assets

This subject doesn’t only affect the very wealthy. Inheritance Tax (IHT), in particular, is becoming more of an issue for many of us due to rising house prices and complex family situations and making provision for your loved ones is an essential part of managing your estate and assets. If you have spent many years building up your personal wealth, you’ll want the comfort of knowing that upon your death your estate will pass into the hands of your chosen beneficiaries.

Help ensure your loved ones are provided for

By obtaining financial advice from a certified wealth planner who can help with estate preservation planning, you can plan for your loved ones to be provided for after you die. Planning is in everyone’s best interests and it allows for a much smoother and less stressful transfer of your wealth to children, grandchildren, and other beneficiaries.

Planning gives you peace of mind knowing that your affairs are in order and that your loved ones will be taken care of after you are gone. This is important for everyone but may be especially important for those who have complex or significant amounts of assets.

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

Unfortunately, some people leave this planning until it’s too late. The sooner you start, the more provisions you can put in place during the course of your lifetime. Planning can also help you to ensure that your assets go to the people that you want them to go to. If you do not have a plan in place, your assets may be distributed according to the laws of intestacy.

This could mean that your assets do not go to the people that you want them to go to. However, if you have the right plan in place, you can specify who you want your assets to go to. Have you considered what will happen to your estate when you’re gone?

Wealth transfer - what you need to know

Inheritance Tax (IHT) is not payable on the first part of the value of your estate – the ‘nil-rate band.’ For the current tax year the nil-rate band is £325,000. If the total value of your estate does not exceed the nil-rate band, no IHT is payable. 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 (not written in an appropriate trust) and personal possessions. You also need to include any gifts made, such as cash or items of value, in the seven years before death, as they need to be added back to the estate. Outstanding debts and funeral expenses can be deducted from the value of your estate.

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, step-children 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 Inheritance Tax allowance to £500,000 (£1,000,000 for a married couple).

There are ways you can mitigate the amount of IHT you may have to pay, such as:

1. Make a Will: dying intestate, or dying without a Will, means that 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. For example, if you don’t make a Will, then relatives other than your spouse or registered civil partner may be entitled to a share of your estate, and this may trigger an IHT liability.

2. Make 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.

3. Leave a proportion 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%.

4. Set 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, depending on the trust.

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.

Please note: This guide is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please note, The Financial Conduct Authority does not regulate advice on Will writing, taxation or Trusts.

The content of this guide was accurate at the time of writing. Whilst information is considered to be true and correct at the date of publication, it 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. Changes in regulation, and legislation after the time of publication may impact on the accuracy of the guide.

The value of your investment(s) and the income derived from it, can go down as well as up and you may not get back the full amount you invested.

FP2023-135