In an ideal world, dealing with your estate would be a straightforward process. You could smoothly pass over your hard-earned wealth to your loved ones and leave behind a lasting legacy. However, without careful planning, this might not be the case.
In the UK, the wealth and property you leave behind could be liable for Inheritance Tax (IHT), which might leave your beneficiaries facing a hefty tax bill once you’re gone. According to IFA Magazine, IHT receipts reached £7.1 billion for the 2022/23 tax year, up £1 billion on the previous year.
Meanwhile, inheritance disputes continue to rise year-on-year in the UK, with Royal London reporting a 37% increase in probate challenges between 2019 and 2021.
The simplest way to avoid potential conflict and problems arising from your estate is to take the time to sit down with your loved ones and discuss your plans.
Read on to learn why that might be a good idea and a few key steps that can ensure the process of handling your estate is as smooth as possible.
If you intend to leave your estate to your loved ones, it’s probably a good idea to involve them in the process
According to JP Morgan, one of the biggest risks to the continuity of wealth across generations is family discord. Communication could be the key to resolving problems before they take root.
A few key issues that might need to be discussed include:
- How you intend to divide your estate among your intended beneficiaries
- What your funeral wishes are
- Whether there are likely to be any IHT liabilities arising on your death.
Your loved ones will likely have to deal with these areas during a time of heightened emotions and stress. So, any doubts or unresolved issues could lead to potential conflict.
By taking the time to sit down with your family and potential beneficiaries while you’re still alive to discuss your estate plans, you could tackle any issues head on. It might leave them better informed about your intentions and not reeling from any unexpected outcomes.
Sitting down to discuss your estate plans could also help you learn more about your loved ones’ intentions and wishes, which might help you make better choices about how to divide your estate.
3 steps that can help your loved ones to better handle your estate
- Be proactive and find the time to make a will
Research from Canada Life shows that, of UK adults:
- 33% aged 55 and over don’t have a will
- 41% have no concerns about not having a will
- 14% don’t ever intend to make a will.
In addition, of UK parents who have made a will, MoneyAge reports that 57% of them haven’t discussed their wills with their adult children.
A will allows you to clearly state how you intend to split your assets among your loved ones. Without one, your estate will be distributed in line with the rules of intestacy and this could mean your assets do not pass to the people you would like them to.
Taking the time to make a will could resolve a lot of potential problems and reduce resulting worries.
- Consider gifting your wealth while you’re still alive to help reduce an IHT liability
IHT has the potential to leave your beneficiaries facing a hefty tax bill once you’re gone, especially if your estate is valued over the IHT threshold of £325,000 (2023/24 tax year) — or £500,000 if you intend to leave your home to children or grandchildren. Married couples and civil partners can also pass over any unused allowance to one another, effectively giving them a £1 million allowance.
Remember: IHT is payable at a rate of 40% (2023/24 tax year).
One potential way to reduce your estate’s IHT liability is to gift your wealth to loved ones while you’re still alive.
This could involve gifting:
- From your annual gifting exemption of £3,000 (2023/24 tax year)
- Small gifts of £250 or under
- At weddings, where rules allow you to gift up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to another family member or friend.
There are also additional ways to gift such as gifting directly from your income — which is beholden to certain rules and criteria — or taking advantage of the “seven-year rule” which tapers the amount your beneficiaries might potentially be taxed. If seven years elapse between the time of the gift and your death, the gift will be exempt from IHT.
If you are interested in gifting, a good first step could be to discuss it with your financial planner to ensure your strategy is as tax-efficient as possible.
- Take the time to include your pension schemes in any estate decisions
Defined contribution (DC) pension pots are typically not considered part of your estate for IHT purposes.
When you die:
- At age 75 or over, no IHT will normally be due on any DC pension passed to your beneficiary, but the nominated recipient may face Income Tax at their normal rate when funds are withdrawn
- Before age 75, no IHT or Income Tax will typically be payable.
Most workplace DC pension schemes ask you to nominate beneficiaries and indicate who will receive your pension pot once you’re gone. You can nominate multiple beneficiaries, who can split your pot.
Your pension pot is likely to be a sizeable asset and one which could greatly benefit your loved ones. So, taking the time to decide how it’ll factor into your estate plans could be a smart move.
Get in touch
If you’re interested in learning more about how to improve your estate plans and make the process smoother for your loved ones — such as gifting or dealing with major assets like a home or pension — you might want to reach out to us for further advice.
Email beyourself@murphywealth.co.uk or give us a call at 0141 221 5353.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
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