Estate planning is the process of disposing of an estate in a way which is designed to eradicate uncertainties over the administration of a probate and maximize the value of the estate. If you get your estate planning right it means that in life and when you die, your property will be dealt with and disposed of according to your wishes.
It is important to make a will so you can leave your assets to whomever you want – if you don’t, they will be distributed according to the laws of intestacy which means, for example, that your partner may receive nothing if you’re not married or in a civil partnership. Leaving a will also allows you to choose a guardian for your children aged under 18 and nominate an executor who will handle your affairs after you’ve gone.
If you leave assets worth more than £312,000 (2008-09 tax year), inheritance tax (IHT) at 40% usually has to be paid on anything over that amount, although there are some exemptions (see below). It's also sometimes payable on assets you may have given away during your lifetime.
IHT is not payable if you leave or give away things to certain people and organisations, whether that’s while you’re alive or after your death. These include:
Gifts which are exempt from inheritance tax include:
When calculating IHT, HMRC will look at your affairs for the seven years before your death. If you make an outright gift (i.e., one with no strings attached) to, e.g., another individual or to a trust for someone who is disabled, before you die, this is a potentially exempt transfer which will be free of IHT only if you live for seven years after you make the gift.
By law, if you and your spouse/ civil partner own your home as joint tenants’ the survivor automatically inherits all of the property if one of you dies. If you are tenants in common you each own a proportion of the property which can be left to anyone you choose.
If you want to gift your home to your children while you are alive, IHT will be due unless you live for more than seven years. If you continue living there, you have to pay full market rent otherwise it will not count as an outright gift and will be subject to IHT. You may have to pay an income tax on the benefit you get from having free or low cost use of property you used to owned. If your children go bankrupt or get divorced the house may have to be sold so you may be forced to leave your home.
Trusts are a useful device for ensuring that assets you want to pass on are held and managed according to your wishes for the benefit of someone who may not be ready or able to manage them themselves.
A trust places a duty on a trustee to manage the assets in a particular way for the benefit of beneficiaries. Trusts can bring tax benefits but are complicated things and professional advice should be sought if you want to set one up.
The main types of private UK trusts are:
Transfers of money or property into most trusts are subject to an immediate IHT charge of 20% if they are worth more than £312,000. Tax is also payable every 10 years after the creation of the trust on the value of trust assets above the nil rate band. Trusts for which no IHT is immediately payable on any transfers are:
If you die within seven years of making a transfer into a trust on which you have already paid 20% IHT HMRC will usually charge the additional 20% which will become due on your death.
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