You and yours: Estate Planning and IHT

• You decide on the choice of beneficiaries If you do not set out in a will whom you wish to benefit from your estate, then the state will do it for you. The results are not always what you would expect and can create unnecessary tax liabilities.
• You decide what goes to whom You might want to leave a particular item to a particular person. Without estate planning, those wishes may not become reality.
• You decide the structure Leave it to the state to distribute your wealth and normally anyone aged 18 or over will receive their inheritance outright. In some families, that will not be an issue, but in others placing some constraints on how an inheritance is handled could be essential.

Inheritance tax is the tax on your estate when you die and can reduce the amount that will pass to your beneficiaries.
If your estate is worth more than £325,000 when you pass away then your beneficiaries may be facing an IHT bill. Inheritance tax planning helps you to make use of the available allowances, exemptions, and gifting rules which can reduce the amount you need to pay.

The amount raised via inheritance tax rose by 4 per cent in the 2021/ 22 tax year according to latest HMRC statistics. With inflation and house prices rising, more people are likely to have inheritance tax liabilities on their estate.

1. When a person passes away, everything they leave behind is valued. (If you are leaving everything to a surviving spouse or civil partner, there is usually no IHT to pay.)
2. The Residence Nil Rate Band can increase your tax-free threshold by £175,000 if you leave your home to your children or grandchildren.
3. Debts and any liabilities are subtracted, and any amount above the inheritance tax allowance known as the Nil Rate Band (currently £325,000) is taxed at 40%. This step also takes into account any gifts you have made, which can reduce your IHT liability.

This is in no way and exhaustive list of the gifting rules, reliefs and exemptions. Download our guide for more inheritance tax planning tips, and more on estate planning strategies such as gifting and trusts.

Failure to prepare a Will means your estate will fall under the rules of intestacy. This default can produce some surprising – and unwelcome – results, as explained below.

Your Will needs to be kept up to date. Something that was prepared a decade ago may still be satisfactory, but across such a long period of time your situation and your family’s circumstances will probably have changed. Tax legislation has certainly done so. Remember too that marriage will normally result in the automatic revocation of an existing Will. Divorce does not have the same effect, but it does mean the former spouse or partner is treated as having died before the Will becomes operative.

Intestacy rules in Scotland are subtly different than elsewhere in the UK. Our guide goes into more detail about these changes.

A financial adviser can help you make a plan to pass on your wealth tax-efficiently. You can do most of your estate planning yourself, but for your own and your family’s peace of mind, you may wish to contact a financial adviser to help you plan, and a Solicitor or professional Will Writer to check your Will.

Whenever you make (or amend) your will, you should also consider putting in place a power of attorney. Again, these differ in their names and types across the different countries of the UK.

In England and Wales, there are two types of lasting power of attorney (LPA), both of which let you appoint one or more people (your attorneys) to make decisions on your behalf if you become unable to do so. Read more in our article on the 6 steps to estate planning.