- Table of contents
- What is estate planning?
- Who should consider estate planning?
- How can estate planning help to minimise Inheritance tax?
- When should you start estate planning?
- How can cashflow planning help with estate planning?
- I have assets in multiple countries, what issues could I face?
- As a high net worth individual, what issues could I face?
What is estate planning?
Estate planning is wide ranging and whilst some of the more obvious conversations will be around the financial implications of failing to plan, there are some concepts that aren’t as easy to quantify but are often just as important. In short, estate planning is ensuring that your assets and your responsibilities are passed onto others in line with your wishes after you have died or become incapacitated.
In the context of an ever-changing legislative environment, your adviser will help you to formulate a plan and also regularly monitor and review the plan to ensure it remains fit for purpose. This bespoke plan will be based on your financial circumstances and objectives and will be guided by your priorities, ranging from tax-efficiency to the level of control you wish to retain over assets that are gifted away. In this regard, estate planning is ongoing and establishing a strategy which is robust and adaptable to changes is therefore key. At Saunderson House, we will ensure that you are well informed about any changes and also challenge your thinking as an objective independent party to ensure that your plan is achievable.
We can support you in ensuring that your estate is in order from an administrative perspective. Part of estate planning is ensuing that you have an up-to-date Will, Lasting Powers of Attorney, and Guardians in place for dependents. The Saunderson House Wealth Eco-System is a comprehensive panel of fellow independent leading professionals in their fields, who can assist with establishing the aforementioned documents. Saunderson House can liaise with the different parties to ensure all of the relevant aspects of your estate are held in a central place, to ease the administrative burden on the executors of your Will.
Lastly, a number of our clients view their estate plan as a way to leave their footprint on the world. It is a chance to choose who your money goes to and in some cases to see what your money is spent on during your lifetime.
Above all, we can help to make your estate planning goals as simple, effective, and tax-efficient as possible.
Who should consider estate planning?
Everyone. If someone is relying on you, estate planning is an important tool in ensuing that their financial needs are taking care of, but also ensuing that you have thought about what guardians you would like to look after your dependents in the event of your death. The key take away is that you do not need to be wealthy to embark on your estate planning journey, it is relevant to everyone to varying degrees.
Even if you believe that you have a good handling of your estate, you also need to consider how the estate plan of family members might interact with your estate. For example, have you considered the impact that any inheritance that you might receive will have on your estate plan? Is it necessary to skip a generation and pass any inheritance directly to your children to avoid exacerbating an IHT bill?
These are all things that we will be able to help you with, and as demonstrated above, even if the necessity to create an estate plan is not clear to you, it does not mean that it is not there. That is where our expertise will come in.
How can estate planning help to minimise Inheritance tax?
Currently, the standard IHT rate is 40% and is applied when your estate exceeds the available allowances and exemptions. As a first step and at a high level, the allowances to consider are the nil rate band (£325,000 each) and the residence nil rate band (up to £175,000 each).
Estate financial planning can help to mitigate IHT in a number of ways, and your Saunderson House financial planning adviser will take a holistic view on which methods are suitable for your circumstances and objectives. Some of the most common ways to minimise IHT through estate planning are:
- Make a Will and keep it up-to-date – your Will allows you to detail who you want to inherit your estate, when and in what proportion. If you die without a Will then the distribution of your estate will be defined by the rules of intestacy. This has administrative and likely financial ramifications. For example, unmarried couples do not automatically inherit assets upon the death of a partner.
- Use of pensions – pensions are generally outside of your estate for IHT purposes. For those building wealth, pension contributions can have the helpful side effect of reducing the value of your estate and therefore the ultimate IHT liability. In addition, once you come to draw from your portfolio, it is often appropriate to draw from your defined contribution pensions last for the same reasons. Lastly, you should ensure that you nominate a beneficiary against your pension and keep this up to date through an Expression of Wishes form. Of course, there will be other factors to consider which is where our holistic and bespoke approach to financial planning is beneficial for our clients.
- Make lifetime gifts – passing on your wealth during your lifetime can also reduce the value of your estate and the IHT payable. Our advisers can formulate cash flow forecasts to help demonstrate when you might be able to start gifting assets, and importantly, how much you might be able to gift without impacting your standard of living.
There are a number of exemptions which you can make use of such as the annual exemption, charitable exemption and ‘normal gifts out of income’ exemption which can help you to immediately reduce the value of your estate, while ‘potentially exempt transfers’ become exempt from IHT if the donor survives for seven years after making the gift. Some of our clients like to retain a level of control over their gifts and decide to use trusts. We can help in the decision-making and the record-keeping in relation to gifting.
- Make IHT-efficient investments – from Alternative Investment Market shareholdings (AIM) to investments eligible for the Enterprise Investment Scheme (EIS) there are a number of investments that qualify for reliefs and can reduce IHT. Our financial planning advisers would help to determine which investments are appropriate for you and our Investment Team do extensive research on different IHT-efficient investments.
- Spend more – ultimately, if you reduce the size of your taxable estate, you will be subject to less IHT. With that in mind, some clients decide to spend more during their lifetime as part of IHT mitigation. For example, some clients go on more family holidays with their children or grandchildren to create memories.
- Protection policies – you can use protection policies in trust to cover any IHT bill payable against your estate.
When should you start estate planning?
As soon as possible. It is often a misconception that estate planning is reserved for the wealthy or those later in life. However, the reality is there are so many different elements of your estate plan that you can make a start on.
Often estate planning can be tied in with life events such as building assets in your own name, getting married, having children, buying property abroad, losing a loved one or getting divorced. These all add different considerations and complexity to your estate and you will need to revisit, add to and update your estate plan accordingly.
How can cashflow planning help with estate planning?
Making lifetime gifts or spending more can be an effective part of estate planning. One of the key considerations when making these decisions is affordability. To help clients in their decision-making process we have now integrated a market leading cash flow planning tool into our financial planning offering.
Cashflow planning is becoming an increasingly important part of financial advice; helping clients understand whether they are on track to meet their long-term objectives, as well as highlighting potential planning opportunities. We can create a personalised cash flow plan and model alternative versions to include but not limited to increasing expenditure and making gifts as part of an inheritance tax planning strategy. This can also be regularly updated to include changes to your circumstances.
I have assets in multiple countries, what issues could I face?
It is possible that you will need more than one Will, you should establish an English Will but may also need separate Wills to deal with foreign property. This could include assets in different parts of the UK as it is split into the law of England & Wales, the law of Scotland, and the law of Northern Ireland.
Given the ever-changing legislation globally, having assets in multiple countries means you need to keep abreast of all of the changes that could impact your assets. It is important to note that each country might also have its own rules of succession.
You are also likely to have more complex structures in place such as offshore bonds. These often come with extra estate planning considerations, and you might need to establish an additional probate specifically for your offshore bond.
Another issue you could face is the heavier administrative burden with the potential to encounter language barriers and varying service standards. This could also be relevant for the probate process which is likely to be different than the process in England.
Having assets in multiple countries will increase the complexity of your affairs and make well thought out estate planning essential.
As a high net worth individual, what issues could I face?
You will have assets that are already in excess of the nil rate band, meaning any excess could be liable to IHT on death. If your estate exceeds £2m you will also start to lose entitlement to the residence nil rate band.
High net worth individuals are usually more internationally mobile and as mentioned above, having assets in multiple countries can be complex. You will also need to pay close attention to the rules around residency and domicile and how this might impact your estate.
If you are a high net worth individual and still earning, it is likely that your level of earnings will lead to a reduction in the tax-relievable pension contributions that you can make per tax year. As mentioned previously, the ability to build up funds inside of a pension that is usually outside of the estate for IHT purposes can be a valuable estate planning tool.
Given your level of assets, and if mitigating IHT is important to you, you might be faced with decisions on the right time to gift and also the size of any gifts.
As a high net worth individual, you are likely to be particularly sensitive to changes in legislation around the level of IHT or a reduction/removal or exemptions.
You could also face a liquidity problem, if your assets are mostly illiquid (for example a property portfolio), then your estate might not have enough cash to pay the IHT bill. This is where having a protection policy in trust to pay an IHT bill would prove to be an effective bit of planning.
Our estate planning financial advisers are well versed in financial planning and estate planning leading to comprehensive estate planning solutions for our clients. If you have meaningful assets, it might just be a case of not knowing where to start and this is where we will be able to help.