Putting off your estate planning could be an expensive mistake.
In 2020/21, Brits paid £5.4 billion in Inheritance Tax (IHT). Increasing property values and long periods of investment growth means this figure is likely to increase in the coming years.
The chancellor’s recent announcement, freezing the IHT threshold at £325,000 for the next five years, will also have an effect. It’s estimated this move will bring in an extra £985 million for HMRC by 2026. Potentially affecting an additional 11,000 families.
This alone is a great reason not to put off your estate planning a moment longer. But if you need more persuasion to get your affairs in order and plan how you’ll pass your wealth to the next generation, here are five reasons.
1. Save you – and your family – time and money
By working with a financial planner or simply taking the time to sit down and make a comprehensive list of all your assets, you can see how complicated (or not) your financial situation may be.
Do you have assets spread across multiple bank accounts and savings scattered among different building societies? Start simplifying things. If possible, reduce the number of places your assets are held by closing any smaller accounts.
Remember, if a bank or building society fails, the Financial Services Compensation Scheme (FSCS) will automatically compensate losses up to £85,000 for an individual or £170,000 for joint accounts. If you decide to consolidate your cash savings, it’s wise to remain within these limits.
Do you have different investments, being looked after by different planners or organisations? Take stock and use the opportunity to make a coordinated plan and rebalance your portfolio.
If you realise you may die with assets above the IHT threshold, you could make use of available gift allowances to reduce the amount of IHT payable when you eventually pass away.
Every individual has an annual gifting allowance. In the 2021/22 tax year you can make gifts up to a combined total of £3,000 and they’ll immediately fall outside your estate for IHT purposes.
For larger gifts, your beneficiaries will typically not pay IHT on the value of the gift if you live for seven years after making it. So, the sooner you start, the better. Waiting to make these decisions can be very expensive for those you leave behind.
Gifting your assets to family members is an effective way of reducing your IHT liability. But there are strict criteria that need to be met for this to be an effective strategy for reducing an IHT liability. We can help ensure you establish these arrangements correctly.
2. Ensure you decide how your assets are distributed
Working with a financial planner to gain an understanding of the assets you hold, and ensuring your will is up to date to reflect your current wishes, allows you to make sure your wealth is distributed as you intend.
You can also review and update your wishes in relation to your beneficiaries for your pensions and life insurance policies too.
Don’t forget to consider valuable possessions and sentimental keepsakes. Decide who will get the things that matter to you most. Consider items that are likely to have sentimental value to your family members, such as jewellery, photos, artwork, or antique furniture. Keep a record of who should get what.
If you wish, talk to your family about these decisions. You may find that you want to divvy things up differently based on what you discover during these conversations.
3. Mitigate or even eliminate certain taxes
None of us like to pay taxes. Getting your estate planning organised now might allow you to mitigate some or all the Inheritance Tax your beneficiaries could be liable for.
Along with gifting, which we’ve touched on above, you may want to consider setting up trusts.
Trusts can be an effective way to distribute wealth to your chosen beneficiaries and help reduce the value of your estate that will be liable for IHT, while maintaining some control of the assets.
Some people benefit from using life insurance to cover IHT bills. Again, the sooner you set up life insurance the better, as age and health are primary factors that affect the cost of cover. And it’s important to place these in trust so they don’t form part of your estate and add to your IHT liability.
4. Make it easier for your family to help you
It’s important to make arrangements for what will happen to your assets when you pass away. But you should also ensure your affairs are managed according to your wishes if you’re unable to make decisions yourself.
You can do this by setting up a Lasting Power of Attorney (LPA). This lets you appoint someone, or a group of people, to manage your financial affairs if you’re no longer able to.
With an LPA in place, you can relax knowing that someone you trust can take care of things for you.
Having an LPA puts you in control of your finances and welfare and allows you to enjoy the lifestyle you want now while providing protection against a future change of circumstances.
5. Save loved ones from having to play detective
Get your financial affairs in order now and you and your family will have peace of mind that you know everything is taken care of. Your family won’t have to dig through old mail, statements, and tax returns to see what’s what when you’re no longer around.
Along with making your Will and setting up an LPA, you could create what is effectively an “in case of emergency” document for your family to refer to when needed. We call this your “Book of Life Matters”, which we can work with clients to develop. As a starting point you could detail important information such as:
- Your bank account details
- Your investments
- Any financial protection policies you have
- Where your Will and LPA are kept
- The name of your financial planner, solicitor, and accountant.
Having everything organised will save your loved ones’ time and hassle at what’s bound to be a very difficult time.
Enjoy peace of mind
Estate planning is important. It helps you know how much your estate is worth, makes you aware of any potential IHT liability, and what this might mean for others when you pass away.
Planning now will ensure your assets are passed on to your loved ones in the most secure and tax-efficient way.
We’ll help you navigate the rules and avoid costly mistakes by helping you work through each estate planning step.
You may find it helpful to involve your family in the planning process. This will help them understand your financial circumstances and prepare them for the future.
If you believe that you, your friends or family can benefit from the peace of mind that award-winning financial planning can bring, we’d be delighted to help.
Contact us at firstname.lastname@example.org or call 01202 025481.
Please note that the information provided is not advice and each option should be looked at on an individual basis.