A guide to estate planning in 2022

Jan 18, 2022

All of the property, investments and possessions you’ve built up over the years are testament to your hard work and dedication to your career and providing for your family.

Put together, these form your estate. When you die, it will be divided up and distributed among your beneficiaries in a manner that you see fit and set out in your will.

The catch is, beneficiaries may not be able to receive everything you intend them to if your estate is subject to inheritance tax charges. 

But there are ways to protect your estate from unnecessary tax charges –   unnecessary because they don’t have to be paid at all if you do some forward thinking and effective estate planning.

How does inheritance tax work?

Inheritance tax is charged at a rate of 40% on the estate of someone who has died, above certain thresholds.

There are two thresholds to be aware of. First is the nil-rate band, which is £325,000 for the 2022/23 tax year. It means an estate with a value below £325,000 will not see a tax charge at all – only the value above it will be taxed.

Then there is the residence nil-rate band, which will apply to you if you’re passing on a family home to direct descendants, such as your children or grandchildren. 

This currently stands at £175,000, effectively increasing the amount you can pass on tax-free to £500,000 – if your estate includes property, that is.

In addition, married couples and civil partners can inherit each other’s estates tax-free, meaning that a surviving spouse could potentially pass on an estate valued at £1 million, completely tax free.

Reducing your inheritance tax bill

To reduce your inheritance tax bill – or technically, the bill your beneficiaries end up paying when they inherit parts of your estate – understanding these thresholds is essential. Some individuals in fact purposely decrease their estate to stave off a tax charge.

One way you can do this is by making gifts during your lifetime – you just need to know your beneficiaries will have to pay tax on gifts you make during the final seven years of your life. 

Known as the ‘seven-year rule’, it’s difficult to plan around, but highlights how important it is to start thinking about your estate as early as possible.

Writing your assets into a trust is another way to protect them from inheritance tax, as these generally won’t be considered when the value of your estate is worked out.

You may, however, face a tax charge if your transfers exceed certain thresholds or fall within the seven-year rule. Trusts are one of the more technical aspects of estate planning, so make sure you contact a professional before you factor trusts into your plan.

Pensions are also tax-efficient tax savings vehicles, which normally fall outside your estate. You can nominate someone to inherit your savings by contacting your pension provider.

Writing a will

Writing your will is an essential part of estate planning. Without one, your estate could be distributed according to the rules of intestacy

Under these rules, your assets may be divided up in a way you wouldn’t want, and in many cases, they can result in higher tax charge than is necessary.

In your will, you should set out clearly and concisely who you want to benefit from your estate. You will also need to name an executor who will ensure your wishes are carried out.

To write a legally valid will, you must be sound of mind and witnessed signing it by two people over the age of 18 who are not your beneficiaries.

For help with estate planning or writing your will, don’t hesitate to get in touch with us.

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