The UK is a country with a relatively high level of Inheritance Tax (IHT) and Estate Planning compared to other countries in Europe. This article will provide an overview of the current IHT and Estate Planning regulations and how they may affect an individual.
What is Inheritance Tax?
Inheritance Tax (IHT) is a form of tax levied on a deceased individual's estate after their death. It is payable by individuals or companies who are inheriting assets or money from the deceased person. IHT is calculated as a percentage of the total value of the estate when the individual dies, and it is paid to HMRC by the executor of the will after the individual has passed away. The UK government recently increased the nil-rate band allowance for IHT from £325,000 to £500,000, meaning that individuals with assets or property worth up to £500,000 are exempt from paying IHT. Any funds or assets which surpass the limit are taxed at a rate of 40%.
What is Estate Planning?
Estate planning is the process of organising an individual's assets, finances, and personal circumstances before death. It is a way of ensuring that your wishes are respected after you die, and that your estate is distributed in line with those wishes. Estate planning can also help to minimise the amount of Inheritance Tax which your estate may have to pay.
Estate planning begins with deciding who you want to be the executor of your will and any guardians for any children you may have when you die. You may also want to consider setting up trusts and inheritance tax planning measures such as gifts, Insurance, Wills and Lasting Powers of Attorney.
Making gifts during your lifetime is a popular way to reduce the potential IHT burden on your estate after you die. Gifts must be made voluntarily, and gifts of more than £3000 should be reported to HMRC. Gifts may be suitable if you are willing to part with your assets now in exchange for a reduction in the IHT liability on your estate.
The sale of life insurance policy purchased by the deceased can form a part of an IHT planning strategy. When the policy matures, the proceeds can be used to pay any Inheritance Tax which may be due on your estate.
Making a Will is one of the most important aspects of estate planning. A Will allows you to express your wishes regarding the distribution of your estate and provides peace of mind to both you and your family. A Will should be regularly reviewed as your circumstances change to ensure that it is up to date and still reflects your wishes.
Lasting Powers of Attorney
A Lasting Power of Attorney (LPA) is a legal document which allows you to appoint someone you trust to manage your affairs if you become unable to do so yourself. This could include managing your finances, health care decisions and property. LPAs are created with a solicitor, and there are two types; Property and Financial Affairs and Health and Welfare.
Inheritance Tax and Estate Planning are complex areas of law and it is important to seek the advice of a professional before making any decisions. However, understanding the aspects of IHT and estate planning discussed in this article can help to put you in a better position to plan for the future and ensure that your wishes are respected.