Estate planning. It’s something many of us will put off thinking about until much later in life. While planning what will happen to your hard-earned assets after you’re gone can seem like a sombre task, it’s essential for ensuring your nearest and dearest are looked after.
Will your loved ones be looked after?
Accessing the right information when you’re thinking about your estate can be both a practical and emotional challenge, as is finding the right support after a loved one has passed away. Here’s a few essential facts about estate planning, including what to consider regarding your ISAs, pensions and home.
Where there’s a will there’s a way
Writing a will is essential if you want to ensure your loved ones receive inheritance as you intended. If you don’t, then your assets will be split according to the government’s intestacy rules. Having a will in place is especially important as your will can determine who executes your wishes and how you want your estate to be divided up.
The power of attorney
Appointing a lasting power of attorney for property and financial affairs, either someone you know or a professional firm, means there’s someone in place to be contacted and manage your estate in the event that you are no longer able to do so. The person who has power of attorney can contact financial providers, safe in the knowledge that they have the authority to act on your behalf.
Your inheritance tax allowance
Your estate includes any asset with a financial value, including cash, investments, vehicles, property, some businesses and potentially any life insurance policy pay outs. The per-person inheritance tax (IHT) threshold is currently frozen at £325,000; anything over this threshold is taxed at 40%. However, there’s typically no inheritance tax on assets left to an exempt beneficiary such as your spouse or registered civil partner, or a charitable foundation. The per-person inheritance tax (IHT) threshold is currently frozen at £325,000; anything over this threshold is taxed at 40%. However, there’s typically no inheritance tax on assets left to an exempt beneficiary such as your spouse or registered civil partner, or a charitable foundation. In certain circumstances the nil rate band and residence nil rate band are transferable to the surviving spouse or registered civil partner which has the impact of increasing the amount of nil rate band available to use against the estate of the surviving spouse when they die.
Sheltering your home from tax
In addition, there is an extra inheritance tax allowance per person, known as the residence nil rate band - currently £125,000 but rising to £175,000 in two years’ time - for your primary home, assuming your total estate is worth less than £2 million. This means that, taking into account all thresholds and transferable reliefs, a couple will be able to pass on a home worth £1 million entirely tax-free to their children by April 2020.
Taxing investment issues
Pensions are now generally exempt from inheritance tax. However, any subsequent pension income / drawdown may be is usually subject to income tax at your marginal rate. Regarding ISAs, the tax-free ISA wrapper can now be passed on to your spouse or civil partner, but not to children. In addition additional permitted subscription rules allow you to absorb their late spouses’ ISA allowance in addition to the £20,000 tax-free limit on their own ISA.
The gift of time
Lifetime gifting can also be a useful strategy for supporting family or loved ones while alleviating the potential burden of inheritance tax. An annual allowance of up to £3,000 (and unlimited £250 gifts to different people) can be given away each year with no inheritance tax liability, in addition to other possible gifts. Larger cash gifts can also be exempt depending on how and when they are given. Some larger gifts given during lifetime may be subject to a lifetime IHT charge but and may also be subject to IHT in the event that you pass away within seven years, taper relief may apply.
At Legal & General, we know that major life events can lead to difficult financial decisions. We strive to ensure our customers have the exact guidance they require at their disposal. If you need additional support after the death of a partner, please visit our wellbeing hub or contact our call centre, where you can speak to a trained representative. We don’t offer financial advice or estate planning, but you can speak to our call centre about individual portfolios or funds that you hold.