The transfer of wealth to your children – better known as inheritance planning -Â is a complex area of personal finance that must be well planned in order to work efficiently.
The central factor to consider in inheritance planning is taxation, and in particular Inheritance Tax, which, if left unheeded, can be applied to parts of your wealth or ‘estate’ at a rate of 40%.Â
Here we give our top tips on efficient wealth transfer and inheritance tax planning.
Make a Will
Making a will is the keystone of inheritance planning. If you die with no will in place (‘intestate’), only the first £125,000 of your wealth passes automatically to your spouse, under UK law. Depending on circumstances, parts of your wealth above that could be passed to your parents (if alive), brothers and sisters, and other relatives. A will is essential, to ensure that your wealth is transferred in accordance with your wishes.
Keep your will up to date
Your will nominates those who will receive your wealth when you die. It is important, therefore, to update your will, if your circumstances change. Be aware, for example, that if you make a will as a single person, but subsequently marry, your marriage renders the will invalid.
Be aware of the value of your ‘estate’
For inheritance purposes, your wealth includes a number of assets which collectively go to make up your ‘estate’. These include the value of your property, payouts from insurances, savings, investments, your car, and value of second properties, such as a holiday home. Your liabilities and debts will be deducted from this sum, leaving the value of your net wealth – your ‘estate’.
Plan to avoid Inheritance Tax
Knowing the value of your estate is crucial in planning to avoid inheritance tax. The current allowance before inheritance tax is due is £325,000 per person (i.e. £650,000 for a couple), rising to £350,000 and £700,000 respectively in 2010. If your estate exceeds these amounts, the difference could be liable to inheritance tax at 40%. The good news is that inheritance tax is avoidable, with a little good planning.
Write your life insurance ‘in trust’
There are two advantages to writing your life insurance policy ‘in trust’. First, this takes the insurance cover out of your estate, so that it does not push your estate’s value up towards the threshold for inheritance tax. Second, as the insurance is not part of your estate, the payout is not delayed while legal matters concerning your estate are resolved (which can take three months to three years). The monies would be immediately available to your dependants upon your death. The ’in trust’ arrangement is best put in place at the beginning, when a life policy is being set up.
Gift your property
Gifting your property to your children before you die is an efficient strategy for passing on your wealth. However, under the ’7-year rule’, you must survive for 7 years after the gift, for it to become tax-free. Furthermore, if you continue to live in the property, the tax exemption may not be available, as the property will be classed as a ‘gift with reservation’, due to the fact that you continue to benefit from it. To avoid this, you must pay your children rent at current rates.
Use cash gifts
Certain cash gifts are exempt from the 7-year rule. You may gift your children £3,000 per year. You may also give your children £5,000 and your grandchildren £2,500, as wedding gifts.
