The goal, of course, behind estate planning is to ensure your family’s wellbeing after you’re gone. Inheritance tax is just one of the elements you need to consider when estate planning, but don’t forget the role of life assurance. Our financial expert, Darren Scott-Guinness shares his thoughts on effective estate planning.
This does not constitute advice and advice should be sought in all instances before acting on it. The Financial Conduct Authority does not regulate tax advice.
Where to start with estate planning
Lifetime giving and effective will planning are key parts of a well-rounded estate plan.
Lifetime giving should be one of the first avenues you explore, especially with cash and investments. This is about gifting sums of money within tax regulations throughout your life.
As part of this, you should consider life cover in trust – it plays a crucial role in relieving the inheritance tax (IHT) liability that a gift may incur. Alternatively, it could be used for the increased liability on death for 7 years following the lifetime gift.
If you’re unable to remove your IHT liability completely through lifetime giving, there’s another option that will let you manage and control access to the assets you’re unable to give away but also benefits your beneficiaries — a life assurance protection policy in trust.
How life assurance policies work
As you may know, IHT doesn’t come into effect until both partners pass, so what you’ll need is a last survivor second death policy. There’s a £3,000 annual exemption, so the premiums will either fall under that or be considered gifts but exempt as normal expenditure out of income.
There’s isn’t a hard and fast definition of “reasonable expenditure” – the premiums just needed to have been paid regularly without affecting the payer’s standard of living.
The payout is tax free and the settlor will be able to state who they’d like to be beneficiaries in the form of a discretionary trust. These wishes are not legally binding and can easily be changed, so while the trustees aren’t officially tied down, they will hold weight.
The cost of your premium will depend on health and age, so the earlier you invest in a policy, the better. And once you’ve secured one, you can rest easy because the liability is covered. There’s no need to worry about gifting, loss of control or access to your funds.
An IHT refresher
It’s no secret that IHT is often referred to as “Britain’s Most Hated Tax.” In fact, a 2015 YouGov Survey reported people believed it was the “most unfair” tax out of 11 taxes listed.
Despite its reputation amongst UK taxpayers, not only does the tax affect less than 5% of all deaths, but it doesn’t actually bring in a significant amount of money.
From July 2018-2019, IHT was the lowest earning of personal direct taxes. Since a similar yield is expected in the next 12-month cycle, it remains that less than 1% of the total tax yield will be from IHT.
Because of this, don’t expect any changes in legislation regarding the tax any time soon. The government is perfectly happy maintaining the status quo with IHT for now but that could always change.
Maintain and review your plan
We always recommend to our clients that they regularly review their financial plans – so they can adapt strategies based on any changes in laws, best practice, and change of circumstances, assets, or goals.
If you’re ready to develop or review your estate plan, get in touch with us today.
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