Ask the expert – What is estate planning?

Written by
Tom Lamb
Time to read
6 minutes, 20 seconds

 

As you accumulate wealth, it is important to consider what would happen to your estate in the event of your death. An estate is defined as everything a person owns when they die, and this can include property, investments, money, and personal possessions.

The time to consider your estate isn’t just when retirement is approaching, it is at any age where you have accumulated wealth or possessions. If you are a homeowner, or if you have a family, it is sensible to consider what would happen to your estate in the event of your death. With this in mind, estate planning may be just as important for someone in their twenties as it is for someone in their sixties. As unlikely as it may seem, you have to be prepared for what may happen to your estate in the event of death.

If you don’t plan appropriately, the wealth or assets you’ve accumulated may not be passed on as you would have wished.

If you are in a position where you have an estate, consider writing a Will. This is a legal document that helps to divide your property and possessions in the event of your death.

When producing your Will, consult a solicitor and financial adviser.  A Will alone isn’t necessarily the most effective option for passing wealth to the next generation.

With the current rate of inheritance tax at 40% for estates over £325,000, you may want to consider how you can pass on wealth in a tax efficient way. If your estate exceeds the £325,000 threshold, you will be liable to inheritance tax of 40% on anything over the £325,000.

Under current 2023/24 tax rules, most individuals also have a further allowance which can be offset against your main residence, this is called the Residence Nil Rate Band.

The Residence Nil Rate Band (RNRB) is an allowance which reduces the amount of Inheritance Tax an individual might pay when passing on a qualifying residence to a direct descendent. In the current 2023/24 tax year, the Residence Nil Rate Band is currently £175,000 and is in addition to the Nil Rate Band.

As part of our Ask the expert series, we sat down with Neil Rayner, the Head of Central Advice at True Potential Wealth Management.

Neil reveals his expert insights into estate planning and how to consider inheritance tax.

 

What is estate planning?

Estate planning is looking at your wealth and assets, and deciding what may happen to these in the event of your death. The estate planning process involves ensuring that all of your assets are taken into consideration. This may include your house, it may include any second properties that you have, and also any investments that you have as well.

Estate planning reviews all of your assets and it is normally done by a financial adviser, taking into consideration anything that you have within your estate.

By taking a total view of your assets, properties and investments, you can see a total value of what your estate is worth. A financial adviser will normally review this and try to increase tax efficiency where possible, and also to minimize inheritance tax, which is levied at 40%.

It’s wise to have a review with a financial adviser to look at your total assets, and to see if you have an inheritance tax liability that would be due in the event of your death.

You can normally transfer any unused percentage of the inheritance tax nil rate band to a surviving spouse or civil partner in the event of death. The transferred nil rate band would effectively increase the nil rate band of the surviving spouse or civil partner. This area of financial planning is complex so speak to a financial adviser if you are unsure of how this would impact your estate planning.

 

What should you consider when estate planning?

Things to consider when looking at estate planning could be things like your main residence, your house, it could be any other additional properties that you hold.

It could be investments that you have or cash in the bank. When thinking about investments, your Pension is an important investment to consider.

The good thing about the Personal Pension is that a Personal Pension is normally outside of your estate for inheritance tax purposes. This means that it wouldn’t be counted towards your estate and would not be valued as part of the inheritance tax rules.

If you do decide to put money away into your pension, you should be aware that you cannot withdraw it until you are at least age 55. This will be increasing to age 57 in 2028, and due to rise further over the coming years. Payments are discretionary, and it is also important to note that with all investing, your capital is at risk, and you might get back less than you invest.

 

What does the nil rate band and resident nil rate band mean? How could these affect my estate planning?

The nil rate band is basically the amount of your estate that you can leave to your beneficiaries upon death free of Inheritance Tax. In the current tax year this limit is £325,000 per individual, and any of the estate valued over this amount is charged at 40%.

The resident nil rate band is an additional allowance that individuals may be entitled to if they leave their main residence to a child or closely inherited person. In the current tax year this additional rate is £175,000 per individual. This in essence could mean that individuals who qualify for the residence nil rate band have up to £500,000 in nil rate bands each for inheritance tax purposes. For couples, this could mean they are entitled to up to £1,000,000 of nil rate band cover.

What happens to my investments when I die?

When you die all investments within your estate are reviewed for inheritance purposes. However, it is wise that you speak with a financial adviser before the fact, to put a financial plan in place to determine how your investments will be inherited.

Pensions, for example, are normally outside of your estate from an inheritance tax point of view, whereas an ISA would not be.

So, it’s always wise to review with a financial adviser when looking to increase your tax efficiency. We recommend that you speak to a financial adviser who will guide you in the right direction.

 

If you are invested with True Potential Investments, you can log on to your client site or the True Potential app to name Pension beneficiaries. There is an expression of wish from which you can complete, and it’ll allow you to name each individual with the desired percentage that you wish to allocate the proportion of the fund in the event of your death. Pension Trustees will have final say on the allocation of the investment based on information you have provided prior to your death and information provided by the beneficiaries after your death.

 

Do more with your money today. Consider who you would want as a beneficiary in your Pension, and update your expression of wish. What other subjects would you like to see covered in our Ask the expert series? Ask your questions on our Twitter page @TruePotential_

 

With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Eligibility and Tax rules apply. Tax is subject to an individual’s personal circumstances, and tax rules can change at any time.

The Financial Conduct Authority do not regulate, Will Writing, Tax Advice and Estate Planning. This blog is not personal financial advice.

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