Will Aid Month is marked during November each year and provides the perfect opportunity to write a will or to ensure your current will is up to date. Throughout the month, participating solicitors waive their fees for writing a basic will, in exchange for a voluntary donation to the Will Aid charity.
But having an up-to-date will in place is only half the battle. You now need to understand how it fits into your wider estate planning.
You might know how you want your estate to be distributed on death, but it’s only through tax-efficient estate planning and careful budgeting that you can be confident there’ll be money left to pass on. You might also want to give some money while you’re still alive.
Keep reading for your indispensable look at estate planning, from Inheritance Tax (IHT) mitigation and later-life budgeting to charitable giving this Christmas.
1. Gifting during your lifetime could lower the value of your estate… and the Inheritance Tax liability you leave behind
While you might plan to pass on the majority of your estate on death, giving during your lifetime could be particularly tax-efficient.
If you think you might be liable for tax, passing on wealth while you are alive could lower your estate’s value for IHT calculation purposes, so reducing a potential liability. Giving while living has the added benefit that you’ll be around to see the difference your money makes to your chosen recipients. They might even receive the money when they need it most.
Gifts made during your lifetime usually fall outside of your estate if you survive for seven years after making the gift and are known as “potentially exempt transfers” (PET). Gifting earlier in life increases the likelihood of you surviving for seven years and could also mean a lower rate of IHT is payable when you die.
While IHT is usually payable at 40%, for gifts in excess of the nil rate band (currently £325,000) this rate is lowered depending on how long you survive after making a gift, thanks to “taper relief”.
Some gifts are free of IHT as soon as you make them, thanks to HMRC exemptions like:
- The annual exemption, which allows you to gift £3,000 during the 2024/25 tax year, with any unused amount carried forward to the next tax year.
- Gifts from regular income, an exemption that allows you to make regular gifts, as long as you can prove the gifts are regular, from your income, and don’t detrimentally affect your standard of living.
- Small gifts up to £250, perfect for birthday and Christmas presents for example. You can also provide a wedding gift of £5,000 to your child (lower rates apply to grandchildren and non-family members).
These gifts don’t have to mean rethinking your wishes or changing your will, but they could mean you give loved ones an inheritance earlier and save them IHT when you die.
2. Budgeting for later-life care
Estate planning isn’t a later-life concern. Rather, it needs to be factored into your long-term plans and budgeting from the outset.
Your pension fund is designed to provide an income for the rest of your life, but your retirement expenditure is unlikely to be consistent. You might have heard us speak before about the “retirement smile”. Expenditure tends to be high in the early, active years of retirement, before dipping as you settle into life after work and begin to slow down. Costs can increase again later in retirement – completing the smile – if care is needed.
Careful budgeting might mean that you still have sufficient funds (which might include income from non-pension sources) to cover these costs.
Factoring in this second rise in potential expenditure is crucial. It could help to ensure you don’t run out of money when you need it most.
Think about the order in which you access pension benefits and when you opt to take tax-free cash. While current rules mean that unused pension funds sit outside of your estate for IHT purposes, changes announced in the Autumn Budget mean that this will no longer be the case from April 2027.
3. Charitable legacies
With Christmas just around the corner, it’s only right that our thoughts turn once more to gifting, and to charitable legacies.
Your will is the best way to make your wishes on death known and to ensure your wealth is divided in line with those wishes. This might include leaving money to a cause you care about. There are three main ways to do it, by leaving:
- A residuary legacy, leaving a percentage, or all of your estate (once all other bequests have been made and costs and debts have been paid) to a particular charity.
- A pecuniary legacy, which is one of the simplest ways to leave money, by providing specific sums to the charity (or charities) you wish to support.
- A specific legacy, which allows you to donate specific items to specific charities. As the name suggests, you’ll have to be clear about exactly which items you want to donate, and to where.
Charitable legacies needn’t be entirely altruistic – there are tax benefits for you too. Donate 10% or more of your estate’s net value to charity and the rate of IHT payable on any qualifying remainder of your estate could drop. This decrease will usually be from 40% to just 36%.
Get in touch
If you’re looking for an independent financial adviser in Milton Keynes or Olney, look no further. At Jane Smith Financial Planning, we’ve been helping clients for 30 years, so contact us at info@janesmithfinancial.com or call 01234 713131 to see what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief. Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
The Financial Conduct Authority does not regulate estate planning or will writing.
Production
