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Estate planning: how to transfer your wealth effectively

Through estate planning, you can also take steps to minimise the impact of taxes and other costs on your estate, as George Square Financial Management explains.

Estate planning can be an emotional subject, and as a nation we are often reluctant to talk about inheritance with our loved ones. But spending time planning how you’d like your estate to be transferred following your death is the best way of ensuring your assets are given to the people and organisations you care about.

Estate planning: an overview

An important part of wealth management, estate planning is the process of making a plan for how your assets will be distributed upon your death.

No matter how large or how modest, your estate is comprised of everything you own. This includes your home, cars, other properties, savings and investments, life assurance (if it’s not written in an appropriate trust), furniture, jewellery, works of art, and any other personal possessions. To establish the value of your estate, it is first necessary to calculate the total worth of these assets.

Having an effective plan in place for your estate will not only help to ensure that those you care about the most will be looked after when you’re no longer around, but it can also help minimise Inheritance Tax (IHT) liabilities and see that assets are transferred in an orderly manner.

Planning for Inheritance Tax

IHT is calculated based on the value of the property, money and possessions of someone who has died if the total value of their assets exceeds the £325,000 nil-rate band, or £650,000 if they’re married or widowed. In 2017, an additional main residence nil-rate band was also phased in; this currently stands at £175,000. However, not everyone can benefit from this allowance – read our article on the rules regarding the residence nil-rate band here.

With careful planning, it is usually possible to pass on more of your wealth to your chosen beneficiaries and pay less IHT. We’ve compiled some top tips for minimising your IHT liabilities:

1. Make use of gift allowances

One way to pass on wealth in a tax-efficient manner is to take advantage of gift allowances. By gifting assets to loved ones while you’re still around, you can enjoy seeing them being put to good use, while simultaneously reducing your IHT bill.

Every person is allowed to make an IHT-free gift of up to £3,000 in any tax year, and this allowance can be carried forward one year if you don’t use up all your allowance. This means you and your partner could gift your children or grandchildren £6,000 this year without that gift incurring any IHT. You can continue to make this gift annually.

In addition, you are able to make small gifts of up to £250 per year to anyone you like. There is no limit to the number of recipients in one tax year, and these small gifts will also be IHT free. This is providing you have made no other gifts to that person during the tax year.

2. Assets exempt from IHT

Some gifts and property are exempt from Inheritance Tax (IHT), such as some wedding gifts and charitable donations. Relief might also be available on certain types of property such as farms and business assets.

Business relief (BR) acts to protect business owners from IHT on their business assets. It extends to include the ownership of shares in any unlisted company. BR also offers partial relief for those who own majority rights in listed companies, land, buildings or business machinery, or have such assets held in a trust.

3. Life assurance within a trust

A life assurance policy in trust is a legal arrangement that keeps a life insurance pay-out separate from the valuation of your estate after you die. By protecting the proceeds of a life assurance policy through putting it in an appropriate trust, you could safeguard it from IHT.

An appointed trustee(s) typically oversees the proceeds of a trust. It’s the responsibility of the trustee to make sure the money you’ve set aside goes to the people you want it to after you pass away – who are known as your ‘beneficiaries’. 

4. Keep wealth within a pension

Your pension is not part of your taxable estate, which means that, unlike many other investments, it is normally free of IHT. Keeping your pension wealth within your pension fund and passing it down to future generations can, therefore, be very tax-efficient estate planning.

Remember that any money you take out of your pension becomes part of your estate and could be subject to IHT. This also includes any of your tax-free cash allowance that you may not have spent.

Putting your wealth in the right hands

Estate planning is a complex area that is subject to regular regulatory change. Whatever you wish for your wealth, George Square Financial Management can tailor a plan that reflects your priorities and particular circumstances. To find out more, or if you have any questions about protecting your estate, please don’t hesitate to contact a member of the team.

For advice about estate planning, call George Square Financial Management on 0115 947 5545 or send us a message here.

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