Estate Planning

Estate planning is the process of arranging your financial affairs to minimise the impact of Inheritance Tax on your estate when you die. Avoiding inheritance tax, or IHT, is perfectly legal, providing you do not break any tax rules.
Establishing your net worth

The first step in estate planning is establishing someone's net worth. From there, an estate planning professional, like an accountant or solicitor, can establish your estate's likely tax liability and then look at ways of reducing what is paid.

Some estate planning decisions are quick and easy; for instance, writing life insurance policies in to trust removes the value of the pay out from an estate. Other procedures are more complicated and involve following specific rules.
After working out net worth, an estate planner will then help you write a will. Next, the estate planner will look at the value of any gifts made during your lifetime that may or may not be exempt from IHT.

Gifts and exemptions

IHT laws allow for several exemptions that remove property from an estate during someone's lifetime. The most common is a PET (Potentially Exempt Transfer) that lets someone give away property that is IHT free providing they live for seven years from the date of the gift.

The problem is these gifts have to be unconditional or 'without reservation' to make them tax-free. For example, giving away your home does not avoid IHT if you remain living there without paying a market value rent. Similarly, giving away a buy to let does not work for avoiding IHT if you keep the rent as income.

Wills and trusts

Many estate planners will recommend putting property in to trust for high net worth individuals whose estates stand to pay a lot of IHT. Due to the complicated law involving IHT, trusts and wills, it is worthwhile paying for an experienced professional; the best generally have a STEP qualification (Society of Trust and Estate Planners).

Interaction with capital gains tax

Someone making a gift to an individual other their spouse has to watch out that they are not triggering capital gains tax on the disposal. In some cases, the person receiving the gift may have to pay Land Duty Stamp Tax (Stamp duty).

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