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Estate planning is all about arranging your personal affairs in a manner that suits your wishes. This can involve making a will, setting up trust arrangements and gifting strategies.
A will comes into effect only after death and directs who will receive property upon death. It appoints a legal representative(s) to undertake the wishes of the deceased.
If an individual dies without a valid will, they die ‘intestate’, and their wealth may not be distributed in the way they would have wished.
Inheritance tax (IHT) is paid upon a UK-domiciled person’s death if their estate exceeds their IHT threshold (known as the nil rate band).
Amounts in excess of the nil rate band are liable to tax at 40% payable by the beneficiaries of the estate.
IHT is also liable on UK-sited assets for a non-UK domiciled individual – e.g., British property owned by someone from another country.
Domicile is a complex UK common law concept. The basic rule is that a person is domiciled in the country in which they have their home permanently or indefinitely – it’s usually the country you regard as your original homeland.
You can live abroad for many years and remain domiciled in the UK for example, and it matters because a British person’s liability for IHT may depend upon it.
The current nil rate band threshold is £325,000 for an individual and £650,000 for a married couple or civil partners.
If a person is widowed, it could be £650,000 depending on how much of the allowance was used when their partner passed away.
Certain transfers are automatically exempt from IHT, depending on who the beneficiaries are, for example spouses/civil partners and charities.
There are also gifts exempt from IHT, which include small gifts - up to the value of £250 in any one tax year – that can be given away to as many people as you wish.
An amount of £3,000 is annually exempt each tax year, which can be carried over to the following tax year, and subsequently you could have a maximum of £6,000 in one tax year.
Trying to reduce how much IHT is due on an estate is complicated, but you may be able to reduce how much tax is paid by:
Leaving a legacy to charity
Putting your assets into a trust for your heirs
Leaving your estate to your spouse or civil partner
Paying into a pension instead of a savings account
Inheritance tax and estate planning are areas of special expertise in financial planning, areas in which we have extensive experience.
You can give as much away as you wish to any chosen beneficiary (other than to a trust) during your life.
Such gifts only become exempt from IHT however, if you survive the date of the gift by seven years.
Should you die before the end of seven years, the value of the gift is subject to IHT.
If you die between three and seven years after making the gift, and the total value of the gift is over the £325,000 threshold, any IHT due on the gift is reduced on a sliding scale.
This is known as taper relief.
A trust is a legal arrangement where you give cash, property or investments to someone else so they can look after them for the benefit of a third person.
When you put money or property in a trust, provided certain conditions are satisfied, you don’t own it any more. This means it might not count towards your inheritance tax bill when you die.
Trusts are complex and require bespoke advice.