The inheritance rules for people without wills are complex, but for many people, especially those with significant assets, the basic assumption that their spouse or partner will inherit everything is simply incorrect. This can cause a great deal of anguish. For this reason alone, one of the best pieces of advice you can give any adult is that they should make a will and keep it under review, especially if there is a reasonable amount of wealth to transfer under the will.
There are many basic planning points which can improve the ability of families to pass their assets down the generations as opposed to passing a good slice of them to HM Treasury. Bearing in mind that a very large number of people now own houses which alone are valuable enough to create an IHT liability, it is no longer true that IHT planning is just for the rich.
Steps you should consider include:
- Transferring assets to your spouse so that your estates are about equal. This will ensure that the maximum exemptions for IHT are used. Currently the IHT exempt amount is £275,000, so if one partner has more than that in assets and one less, it is worth thinking about moving towards more equal estates.
- Gifting away surplus assets. These can be given away directly, or transferred into trust (provided you retain no ‘interest’ in the trust). They will pass from your estate and the IHT charge will be reduced over time, becoming nil after seven years. In addition, there are annual gift exemptions and regular gifts can be made which can also earn IHT exemption. Trusts can be a particularly effective way to ensure provision for children who are not yet adults or when letting them have access to the capital sum quickly is inadvisable for other reasons. The ‘regular gift out of income’ relief is much underused. It allows gifts which are both regular and which once made do not affect the lifestyle of the giver to be completely exempt from being taken into account for IHT purposes. This is a very useful exemption for wealthy families.
- If you are a beneficiary of a trust of someone else’s will and you do not need the benefit, remember that it may well be possible to disclaim the benefits without significant tax implications. However, for an inheritance you only have two years after the event to do this.
- If you have life assurance policies or pensions, consider making the policy proceeds on death (most pensions will pay the whole value of the fund if you die before you take the pension) payable directly to your spouse or children. This will keep the value of the policy from falling into your estate for tax purposes.
- Remember that you may become incapacitated in your old age or, indeed, at any age. An enduring power of attorney (EPA) can be an effective way of making sure your financial affairs are properly managed if you are unable to manage them yourself, for whatever reason. Under an EPA, you give an attorney or attorneys the right to deal with your financial affairs under circumstances which you decide upon. Trying to administer the everyday affairs of an incapacitated adult without an EPA in place can be very onerous. Setting up an EPA, even if it is never needed, is an inexpensive and common sense move for most adults.
- If your children are under 18, you should appoint guardians under your will. The guardians will look after your children’s interests until they are legally adult.
Wills and IHT planning are complex matters and it is sensible to make sure that you plan for the inevitable and keep your will under regular review.