Wills and Inheritance Tax

Most people have no desire to pay Inheritance Tax (IHT) and the good news is that in many cases it actually can be avoided, so here are some areas to focus on if you have concerns in this area.

Wills

A will is a legal document which sets out how you wish your estate to be and dealt with when you pass away.

It’s not essential to have a will at all, but if you don’t then the state will decide how your assets are distributed.  If you are unmarried (or in a civil partnership) then your partner has no automatic right to inherit any assets from your estate. With children, whether you’re married or not, strict rules govern the distribution here and things differ depending whether you are resident in England, Scotland or Wales.

Armstrong Watson doesn’t offer a will writing service, but it is a relatively simple process provided by many legal practitioners, although you can even draw a will up yourself provided you follow the legal guidelines. A will helps ensure the smooth transition of your assets upon your death, including any business interests.

We come across a great number of clients who have wills that they made many years ago and as many have not been reviewed since, they have become out-dated and do not now take account of new legislation.

Residence Nil Rate Band (RNRB)

If you’ve not reviewed your will since 2017 then you may be missing out on the introduction of a new allowance available referred to as RNRB. This was introduced in April 2017 and is an allowance which can be claimed if your main residence is passed to your direct descendants. The allowance is set to steadily increase each year until April 2020 and you can read more about it in our previous article here.

One of the key things to remember with IHT is that technically, it is a voluntary tax. That isn’t to say we can choose if and when we pay it, but that it is perfectly legal to plan ahead to mitigate the tax or avoid it altogether.

Probably the most important thing to bear in mind is that you need time. The more time you have to plan and prepare then the easier it is. The later you leave it, the less time there is to put a plan into action and the fewer the options available.  If you leave it too late there is a greater likelihood that a share of your assets will go to HMRC.

IHT can be complex and there are lots of different solutions available. A professional can help ensure you consider the most appropriate routes. Often it will be necessary for you to seek the advice from both a financial adviser and a legal practitioner.

Simple options

It might seem a bit old-fashioned, but sometimes the old ideas can often be the best. A simple solution is to look at insuring the tax liability, namely, making funds available when you die to pay the IHT bill.

This will require you to apply for an insurance policy, on either a single or joint life second death basis and the amount of cover you select will be paid out by the insurer when you (or both of you if second death is chosen) pass away. This assumes you continue to maintain the regular premiums to fund the policy. Whole of life arrangements are favoured because we don’t know exactly how long we’ll live for.

In many cases the application will need to be medically underwritten by the insurer and if you’re not in the best of health, or you have a history of medical conditions within your family, the initial premium may increase to reflect the increased risk.

Utilising a trust as part of this application is prudent, to ensure that the pay-out goes to who you want it to go to and without it forming part of your estate. A trust means that the sum assured is payable upon production of a death certificate and doesn’t need probate to be extracted before the funds are released.

If you'd like help reviewing your circumstances, please call Matt Slessor on 01228 690000 or email him using the link below.

Contact Matt

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