Estates planning

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.

Making a will

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.

Inheritance tax

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 exemptions

Exempt beneficiaries

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:

• your spouse or civil partner as long as you both have a permanent home in the UK
• UK charities
• some national institutions, including national museums, universities and the National Trust
• UK political parties.

Exempt gifts

Gifts which are exempt from inheritance tax include:

• Wedding or civil partnership ceremony gifts – parents can each give £5,000; other relatives £2,500; and anyone else £1,000. If the wedding is called off and they don’t return the gift you will have to pay IHT. The gifts must be made on the date of or shortly before the ceremony.
• Gifts up to the value of £250 – you can make these to as many people as you like in any one tax year (6 April to the following 5 April) without them being liable for IHT.
• Annual exemption - you can give away £3,000 in each tax year without paying IHT. This can be carried forward if not used for one year only. You can't use your annual exemption and your small gifts exemption together but you can use it with any other exemption.
• Gifts part of your usual expenditure - any gifts you make out of your after-tax income are exempt if part of your regular expenditure. This includes gifts for Christmas, birthdays or wedding/civil partnership anniversaries or premiums on a life insurance policy.
• Maintenance gifts – IHT-free maintenance payments can be made to your spouse, your ex-spouse or civil partner, old or infirm dependent relatives, and your children aged under 18 or in full-time education.

Potentially exempt transfer

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.

Property ownership

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.

Gifting your home to your kids

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

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:

• Bare trust - the asset is in the trustee's name, but the beneficiary can have the income and trust property whenever they wish.
• Interest in possession trust - the beneficiary is entitled to all the trust's income (after expenses), but not the property.
• Discretionary trust – beneficiaries have no automatic right to either the income or the capital: it is up to the trustee to decide who gets what.
• Accumulation and maintenance trust – used to provide money to care for young children. Any income that isn't spent is added to the trust property, which is all later passed to the children. In most of the UK beneficiaries become entitled to trust property at 18. The trust then turns into an 'interest in possession' trust. In Scotland, a beneficiary could require trustees to hand over trust property at 16.
• Mixed trust – this could occur if one beneficiary of an accumulation and maintenance trust reaches 18 and others are still minors.

IHT on trusts

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:

• lifetime transfers into a trust for a disabled person or those created for them on your death.
• trusts created on death for a minor child of the deceased in which the child will become fully entitled to the assets at age 18
• trusts set up under a will for someone who is not a disabled person or minor child of the deceased who becomes entitled to their benefit on the death of the will-writer.

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.