Thinking about what happens to your wealth after you’re gone isn’t always easy, but a little planning now can make a big difference later. Here are ten simple steps to help you start protecting what you’ve built and passing it on tax efficiently.
1. Understand what’s in your estate
Your ‘net estate’ includes your home, savings, investments, gifts made in the seven years before you die and any other assets you own minus any outstanding liabilities and certain exempt assets. From April 2027, unused pension funds will also be counted as part of your estate for IHT purposes, so it’s worth reviewing your overall position early.
2. Know the thresholds
Everyone has an IHT nil-rate band of £325,000, plus a potential residence nil-rate band of £175,000 subject to certain conditions being met. Anything above these limits may be taxed at 40%. Most married couples and civil partners can transfer any unused allowances between them, effectively doubling the amount that can be passed on tax free - up to £1 million when both the nil-rate and residence nil-rate bands apply.
3. Make a will
A valid, up-to-date will ensures your wishes are carried out and can help reduce confusion, cost, and tax for your family. It’s a good idea to review it whenever your circumstances change.
4. Leaving assets to your spouse or registered civil partner.
There’s a spousal exemption when you leave your assets to your surviving spouse or registered civil partner. This exemption does not exist for co-habiting partners so additional planning and making provision for them in your Will, will be required.
5. Make use of exempt gifts
You have an annual exemption of £3,000 each tax year, plus small gifts of £250 to as many people as you like, so long as it’s not the same person benefitting from your annual exempt amount. You can also gift for loved ones getting married. The amount you can gift will depend on your relationship to them.
Regular gifts from ‘excess income’ can also be exempt if you meet the qualifying criteria. Larger gifts may become exempt from IHT if you live for seven years after making them.
6. Leave something to exempt bodies such a political parties or charities
Gifts to political parties or registered charities are exempt from IHT. If you leave at least 10% of your net estate to charity, the IHT rate on the rest falls from 40% to 36%.
7. Make use of trusts
Trusts can help you pass assets to loved ones while keeping some control over who can benefit, when and by how much. Once you gift your assets to your chosen trustees, after seven years those gifts will be outside your estate for IHT purposes, but growth could be removed from the day you make that gift.
If you have life insurance policies written ‘in trust’, this will pay directly to your beneficiaries and doesn’t increase the value of your estate. This also avoids the probate process.
8. Plan for your pension
Pensions can still offer tax advantages for passing on wealth, even after 2027. Completing an ‘Expression of Wish’ ensures the right people or trusts are considered.
9. Keep records
Accurate paperwork - especially for gifts and trusts - helps executors and advisers calculate any future liabilities quickly and fairly.
10. Get professional advice
Inheritance planning touches on tax, law, and family priorities. Speaking with a financial adviser can help you navigate the complexities and create a robust plan.
The resources within these pages can help you find a financial adviser in your local area.
Quick recap:
- Know what counts towards your estate.
- Use allowances and exemptions while you can.
- Keep your will and paperwork up to date.
- Review pension nominations before 2027.
- Professional advice can help you pass on more of what matters.
This article reflects our understanding of current legislation, which may change. While we can provide information, we can’t give you advice and therefore we recommend you seek professional advice before making any financial decisions. Investments can go down as well as up, and you may not get back the amount invested. Tax treatment depends on individual circumstances and available reliefs may vary.