Leaving more than just memories to your loved ones is a wonderful position to be in, but when planning how best to pass on a legacy, there are a number of mistakes that are easy to make if you go it alone. Getting professional advice on your estate's legal and tax structure is one way to give you and your family peace of mind.

You’ve worked hard, built a career, maybe set up and managed a successful business. As a result, you’ve accumulated a portfolio of savings, investments, and assets over the years. You’re all set for a happy and stress-free retirement; you may be looking forward to spending more time with your family, taking extended holidays to far-flung places, starting a new adventure, or simply sitting back and enjoying the good life without the usual routine of work.

Even though money gives you the chance to do the things you’ve always wanted to do, it can also sometimes be a burden. The more you have, the more challenging it can be to manage, which is why we’d recommend having a solid, trustworthy financial planning team alongside you.

If you’re hoping to leave money to the next generation, a good financial planner can help you make informed decisions. It’s the best way to make sure your money goes where you intend it to go, and your beneficiaries aren’t facing an unexpected tax bill.

With that in mind, here are some of the most common mistakes people make when planning their estate.

Leaving more than just memories to your loved ones is a wonderful position to be in

Forgetting to make or update your Will

As soon as you have a family, make a Will and review it regularly to keep it updated. A Will allows you to leave detailed instructions about who you want to inherit your estate, when and in what proportion. If you die without a Will, then the distribution of your estate will be defined by the rules of intestacy, which has significant administrative and financial ramifications. Did you know that if you’re unmarried, your partner will not automatically inherit your estate? Or, if you remarried, any children from a previous marriage may be disinherited?

At the same time as making a Will, you should also consider setting up Lasting Powers of Attorney and put guardians in place if you become unable to manage your own financial affairs.

Failing to keep up with changing rules and legislation

The rules around tax, savings and inheritance are constantly changing. Unless you have the time and the inclination, it’s unlikely you will keep up with all of them. To add to the complication, wealthier individuals often hold assets in more than one country. If that’s you, you will need to pay close attention to the rules around residency and domicile, and how this might impact your estate.

If you’ve remarried, any children from a previous marriage may be disinherited

Neglecting to mitigate inheritance tax (IHT)

On death, as in life, no one wants to pay more tax than they need to. Inheritance tax (IHT) is a big money earner for the government; according to the OBR, in 2019-20 IHT raised £5.1 billion1. 

IHT is normally 40 per cent on the value of an estate above a threshold of £325,000. Any unused threshold may be transferred to a surviving spouse or civil partner, increasing their combined threshold to up to £650,000. If you leave your home to your children, there’s an additional transferable main residence nil rate band of £175,000 (£350k per couple). If you have assets already in excess of the nil-rate band, any excess could be liable to IHT. And if your estate exceeds £2m, you will also start to lose entitlement to the residence nil rate band.

There are a number of ways of reducing your IHT, and a financial planner will be able to advise which ones are most appropriate for you. For instance:

  1. Make lifetime gifts or trusts

    Maximise your tax exemptions by passing on your wealth during your lifetime. Not only are you reducing your estate IHT, but you will also get to see and enjoy the benefits it brings to your loved ones.
  2. Leave money to charity

    As well as being philanthropic, the IHT rate reduces to 36 per cent when 10 per cent or more of the net value of your estate is left to charity. So less to the taxman and more to causes that are close to your heart.
  3. Make IHT-efficient investments

    Your financial planner can advise you on investments that qualify for tax reliefs and can reduce IHT. This includes Business Property Relief (BRP and investments in Alternative Investment Market shareholdings (AIM). These investments are relatively high risk because they invest in smaller companies, so tend to be suitable for more experienced or wealthier investors. 
  4. Put in place IHT protection policies

    If your assets are held in a non-liquid form such as property, your family may face liquidity problems when you die. This could mean they are forced to sell some or all of these illiquid assets to pay the IHT bill. In this instance, having a protection policy in trust to pay an IHT bill would prove to be an effective bit of planning.
  5. Make full use of your pension allowance

    Pensions are generally outside of your estate for IHT purposes. When building up your wealth during your lifetime, pension contributions can have the beneficial side effect of reducing the overall value of your estate, thereby limiting your IHT liability. 

With all that said and done, don’t become so obsessed with minimising IHT (or any other tax) that it conflicts with your wider investment strategy. A sound financial plan will give you the best of both worlds.

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