Building a Lasting Legacy: Estate Planning and Inheritance Tax Explained

Estate planning is a powerful tool for financial security, yet it is often overlooked until it's too late. In just 5 minutes, I will unveil smart strategies to prevent inheritance tax (IHT) from eating into your wealth, ensuring your hard-earned assets stay within your family. So what exactly is IHT? In brief, IHT is a tax, currently up to 40%, levied on assets you inherit if they exceed a certain threshold known as the Nil Rate Band (NRB). The current NRB is ￡325,000 if you are single or ￡650,000 if you are married/ in a civil partnership.

When it comes to estate planning, knowing the true value of your wealth is important. This empowers you to make informed decisions about asset transfers and protect against IHT. The key figure for calculating IHT is the net value of your estate, which is the total assets minus debts at the time of death.

So you're probably wondering what you can do about it?!' Let me share some tips that are both legal and incredibly effective. Let's uncover the golden keys to IHT planning!

Gifting While Alive: You can give away up to ￡3,000 annually without tax and guess what? if you haven't used the previous year's allowance you can use that too, allowing you to gift up to ￡6,000 in the current year. That's right, start spreading the love (and your wealth) while you're still around to see the joy it brings!

Charity Donations: Anything you leave to a UK-registered charity in your will is tax-free. Donate over 10% of your net estate to reduce your tax rate from 40% to 36%.

Life Insurance written in Trust: By writing these in trust, you keep payouts out of your estate and tax free. Trusts are like the secret agents of wealth management – they keep your assets safe and often out of reach of inheritance tax.

Spousal Transfers: Leave everything in your will to your spouse or civil partner to avoid IHT. Unused tax allowances transfer to your partner, doubling the tax-free threshold!

Home to Children: Leaving your home to your children can increase your IHT allowance by an extra ￡175,000 (single) or, as this allowance is also transferable between spouses, up to ￡350,000 (married/civil partnerships); this is referred to as the Residence nil rate band (RNRB). Let's talk about the "RNRB” – a fantastic tool in your IHT toolkit.

Here's how it works: If you own your property and your will (or the rules of intestacy if you don't have one) passes this property to your direct descendants, you can claim the RNRB. Since IHT is a hefty 40% on the value of your estate when you pass away, the RNRB can save you an extra ￡70,000 (single) or ￡140,000 (married/civil partnership)... are those wedding bells I can hear? ??

However, there's a catch for those with larger estates. If your net estate exceeds ￡2 million, your RNRB is reduced by ￡1 for every ￡2 over this threshold. So, while it's a powerful tool, it's essential to plan strategically to maximise its benefits. The RNRB is a valuable allowance in your estate planning arsenal, helping you keep more of your hard-earned wealth within your family.

The 7-year rule for gifts: This is all about gifts made during your lifetime (like money, property, or possessions) falling outside of your estate in 7 years. Some gifts avoid IHT entirely, but most follow specific rules. Taxable gifts are divided into two categories. First, Chargeable Lifetime Transfers (CLT) which include gifts such as transfer into a discretionary trust, are hit with an immediate 20% tax on any transfer that exceeds the transferors available Nil Rate Band. There is no immediate charge on any transfer within the Nil Rate Band.

Then, there are Potentially Exempt Transfers (PET), which do not attract any immediate tax, whatever the size of the gift.

For either transfer, If you give a gift and live for 7 years after, it’s tax-free!

But what if you pass away within those 7 years? well in this case the gift is added to your estate’s value and counts towards your ￡325,000 tax-free allowance. However gifts given between three and seven years before your passing benefit from a tapered tax rate, with less tax the closer you get to seven years. This rule is key for smart, tax-efficient gifting—live for 7 years after the gift, and you can wave goodbye to any IHT liability associated with it.

Let me tell you about Kelvin and Tanya, a lovely couple with two children, who sought the help of a financial adviser for their estate planning. They learned they could combine their UK IHT allowances to ￡1 million, while Kelvin's single sister Hayley, had ￡325,000 (no direct descendants to qualify for the extra RNRB). The adviser explained the 7-year rule for tax-free gifting and used the example of Kelvin's parents, who gifted ￡100,000 and lived beyond 7 years, so it fell outside of their estate. They also learned about exempt gifts like wedding presents up to ￡5,000 and the ability to put protection in place for PET’s and CLT’s (should they pass away within the 7-year period) known as gift inter vivos life insurance. Pensions were highlighted for passing wealth IHT-free, and Term life insurance was suggested to cover any IHT liabilities. Inspired, Hayley also set up a strategy to maximise her allowances. The journey demonstrated the benefits of a financial adviser, offering peace of mind and a secure financial future.

There are also Investments that can be used as powerful Inheritance Tax solutions and a financial adviser can work with you to uncover the appropriate method for your circumstances.

Estate planning ensures that your assets are distributed according to your wishes, sparing your family from potential disputes and legal hassles. Think of it as leaving behind a clear, joyful legacy rather than a confusing puzzle.

As a financial adviser, I guide my clients through creating a will, setting up trusts, and making key decisions about their assets. I can also help you protect your estate from unnecessary taxes, and ensure your beneficiaries are well taken care of. Together, we can chart a course that secures your legacy and brings peace of mind to you and your family.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Will writing involves the referral to a service that is separate and distinct to those offered by St. James's Place and along with Trusts are not regulated by the Financial Conduct Authority.

Reference 1. GOV.UK (2024). How Inheritance Tax works: thresholds, rules and allowances

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Hall & Costello Wealth Management Limited is an Appointed Representative of and represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the Group's wealth management products and services, more details of which are set out on the group's website www.sjp.co.uk/products. SJP Approved 14/08/2024