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Estate &
Tax Planning

Estate and Tax Planning involves assessing the value of your estate (wealth) and helping you to structure your finances tax-efficiently. Your estate consists of all the money, assets, stocks and shares, business, insurance policies and property you own. When it comes to protecting it, the two big taxes that can impact on its size are Inheritance Tax [IHT] and Capital Gains Tax [CGT] – so any tax planning strategy needs to consider the overall impact of these taxes o your estate.  Tax planning strategies also need to consider your income tax position, the impact on your business, the impact on your future needs such as care funding and your general financial circumstances.

Tax planning is an area which people find particularly daunting and something that is often put off or not done at all which leads to far too much tax being paid when it could have been avoided or reduced.

Inheritance Tax

Sound Inheritance Tax planning and advice is vital to ensure that no more tax than necessary is paid from your estate after your death. Currently every individual in the UK has a tax free allowance for inheritance tax known as their Nil Rate Band (NRB). The NRB at present is £325,000.  This means that upon your death the first £325,000 of your estate can be left tax free. The remainder may be subject to 40% without careful planning.

The available NRB is reduced by any lifetime gifts you have made over certain prescribed limits within the last 7 years. So for example if you gave away £50,000 the year before you die your NRB for the remainder of your estate is reduced to £275,000 so anything over that will be subject to 40% tax.

In addition to the NRB there is now a Residence Nil Rate Band (RNRB). This is currently £175,000 in 2020/2021.  However, the property must be left as part of your estate to a direct descendent (children, grandchildren, their spouses, step children, foster children etc).

Example:  let’s say you and your spouse want to make a will leaving everything to each other and then on the death of the second spouse, their estate is to go to your children.  You own your home and it’s worth £400,000 and the remainder of your net joint estate is £700,000 = £1,100,000, you will both have the benefit of your NRB of £325,000 x 2 = £650,000 plus £175,000 each for the RNRB = £350,000.  Therefore, on the death of the second spouse they have the benefit of £1,000,000 which means only £100,000 would attract tax at 40%.  As the property is worth £400,000 the RNRB would apply and therefore no tax would be payable (this is assuming that no lifetime gifts have been made in the preceding seven years).

However, if your total estate exceeds £2million then the RNRB is subject to a taper that reduces the amount by £1 for every £2 your estate exceeds that limit. Any gifts you leave to your spouse, civil partner or to charity within your will are also free of inheritance tax.