Estate planning is to preserve, protect and pass down family wealth. At its simplest, it consists of making a will. But there are plenty of other ways of passing on benefits to your dependants, your chosen charities or other beneficiaries.

Who’s it for?

Estate planning is important for everyone. If you die without a will, your assets could be passed on to some unexpected people. Parts of your estate could go to distant relatives rather than the people you really want.

Tax issues

It’s also important to think about tax issues, especially as tax rules are often complex and can change. Many people are surprised to find that the estate of a loved one is subject to inheritance tax (IHT) but more and more people are being brought into its net because of rising property values and other personal wealth.  

Trusts

Trusts are available that can help you and your financial adviser make sure that your assets are passed on in accordance with your wishes and as efficiently as possible.

A trust is a way of making sure that property is held for the benefit of other people without giving them full control over it. It's set up where there is a transfer of an asset by a person (the settlor) to other people (the trustees) who must hold and administer the gifted asset (the trust fund) for the benefit of specified people (the beneficiaries) in accordance with the terms of the trust.

Inheritance tax planning

What is inheritance tax?

IHT is levied by the Government at 40% on the part of an estate which goes over a certain limit, subject to certain exemptions and reliefs. The limit (known as the ‘nil rate band’) for 2007-2008 is £300,000.

Who does it affect?

There’s a misconception that only the very wealthy should be concerned about IHT. The rise in property prices means that more and more people are leaving estates which go over the tax threshold.

People whose estate has never approached the limit, but who bought their houses a long time ago, are often shocked by the value of the assets they’ve built up. Mainly because of the lack of proper planning, many of them end up paying far more than they need to in tax.

Common questions

Who should benefit from my estate?

The first thing you need to do is decide who should benefit from your estate. Some types of estate planning pass the eventual tax liability on to the person who benefits. For example, any assets passed between a husband, wife or civil partner who lives in the UK are exempt from IHT. However, passing assets between a husband, wife or civil partner could simply delay the IHT liability. So you may want to skip a generation and pass your assets on to your children or grandchildren, for example.

Does making a will solve all the problems?

Making a will is the first and most important step in estate planning. If you don't have a will when you die then the people entitled to benefit may not be the ones that you wanted to benefit and can include extended family under the intestacy rules. There are ways to avoid this happening, such as setting up a trust for your beneficiaries.

Is it important to keep a will up to date?

Once you’ve written a will, you should review its contents from time to time to make sure that it’s still what you want and that it takes account of any changes in your circumstances.

Can people outside the family benefit?

Yes. Gifts to charities or political organisations are exempt from IHT, whether they’re included in a will or made before death. If you want other individuals to benefit, you need to consider the potential IHT liability when making the gift.

Do husbands, wives and civil partners have special IHT exemptions?

Anything passed to a husband, wife or civil partner is free of IHT as long as they live in the UK. But remember this will increase the size of their estate and its potential IHT liability, so it could be worth leaving a large part of your estate (up to the value of the nil rate band, which is £300,000 for 2007/2008) to your children or grandchildren.

What happens to the payments from a company pension scheme?

You should make sure that the list of nominated beneficiaries in your company pension is up to date. There’ll be no IHT payable if the benefits pass to an exempt recipient, for example, your widow or widower. In many pension arrangements the individual has no real control over who receives the death benefits as it is down to the discretion of the scheme trustee or administrator. In such cases, the death benefits shouldn’t be liable to IHT.

Does it make a difference if I retire abroad?

It could. Your assets may be subject to both UK and foreign tax if you live abroad. It's very important to think about what your long-term intentions are and how these will affect your estate, as you may need to plan differently.

Next steps

If you would like more information about inheritance tax planning, you should talk to your financial adviser.