25 January 2021

Protecting your legacy for your loved ones

With sensible planning it is possible to reduce the tax bill that you leave behind for your loved ones. Clare Julian looks at Inheritance Tax and suggests areas that investors should explore

by Clare Julian

Wealth Planner


Making use of the annual £3,000 gift allowance, multiple smaller gifts of £250, and the various other gift allowances are a very good starting point.

These gifts are immediately treated as exempt from the Estate for Inheritance Tax (IHT) calculation purposes.

A lesser known and more underutilised allowance is the gifts out of excess income allowance. If it may be demonstrated that you are not depriving yourself of income that is needed, and if a regular pattern is maintained, such gifts are usually immediately outside of scope for IHT calculation purposes.

Wills

Having a valid Will in place is one of the most fundamental and straightforward ways of ensuring as much as possible of your Estate goes to those intended.

It is important also to keep it periodically under review in case circumstances change. One of the more extreme examples is that a Will is automatically revoked on marriage and rendered invalid. 

A person who dies under this scenario would die Intestate, which will lead to the Estate being divided up in accordance with the laws of Intestacy, (not necessarily how you might wish to leave your assets).

This can also be more time consuming, and not to mention more of an administrative nightmare for those left responsible for administering the Estate.

Financial Advice

Beyond ensuring Wills are up to date, and the basic gift allowances noted above are utilised, larger gifts, known as Potentially Exempt Transfers, (PETs) are another way of reducing a liability and providing a more immediate legacy. Typically, after seven years, the gift falls outside of the Estate, and within that timeframe, the potential tax on the gift can taper down after three years of making the gift. The rules here can be more complex, so it is wise to seek financial advice from a Wealth Planner.

In addition to all the above, there are a number of alternative ways of ensuring one’s Estate is preserved for their nearest and dearest, including, but not limited to: insurance; various types of Trust planning, forms of investment that can qualify for an IHT exemption after two years of holding.

Some of these solutions will be more appropriate than others, depending on individual circumstances, so it is important to seek proper financial advice if your potential IHT liability, or complexity of your situation, necessitates more than just the basics.

The information provided is of a general nature. It is not a substitute for specific advice with regard to your own circumstances.

This article first appeared online at https://www.express.co.uk/finance/personalfinance/1385484/Inheritance-Tax-UK-calculator-payment-trust-threshold-gifts-seven-year-rule-allowance-HMRC

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