What is Estate Planning? Your guide from Aventur Wealth
Updated: Sep 30
What is Estate Planning? In today’s fast-changing, volatile economic landscape, knowing the true value of your estate will help you prepare your family for Inheritance Tax liabilities.
You may have heard of the term ‘estate planning’, but do you fully understand its meaning? Put simply, your estate is made up of ‘assets’ - your property, possessions and money. It’s important to consider how much your assets are worth, if you’re planning on leaving a legacy for your children.
You don’t have to be rich to have an estate. In fact, most people are often surprised when they realise the total value of their assets. This is one of the reasons why it’s essential to have a legally binding Will in place to ensure that your assets go to the right people. Tax efficient estate planning starts by understanding what you have and how it will affect those you leave behind when you pass away.
Valuing your estate
When assessing your total estate value, there are many factors you will need to consider. It’s important to get an accurate valuation of your estate, so you can determine its real worth. If you’ve already had your estate assessed and valued, but it was some time ago, then it’s worth checking this on an annual basis. As house prices and your investments may go up or down, your net worth may change, which could lead to an increased Inheritance Tax liability.
Always use a Qualified Financial Adviser to help you assess your estate value. When valuing your estate, the following factors will be taken into consideration:
Property - your home and any holiday properties in the UK or abroad, such as buy-to-lets, villas and apartments.
Possessions – any high-value jewellery, art, antiques, ceramics, ornaments, furniture, and even designer clothing and shoes may be included.
Money – your bank accounts, pension income, savings, investments and life policies.
Vehicles – your cars, bikes, boats and any other valuable vehicles will be factored in.
Business interests – if you own a business, the net value of the business and any commercial premises will be included. If you’re a shareholder of a business, then the value of your shares will be considered.
Recent budgetary changes to Capital Gains Tax and pension allowances may also be taken into consideration. It’s worthwhile checking these points with your Financial Adviser.
Inheritance Tax (IHT)
Inheritance Tax (IHT) is applied to someone’s estate once they are deceased. This tax liability is usually met by those who have inherited the estate, known as the “beneficiaries”. The amount of tax that would need to be paid will depend on certain factors, including the value of that person’s estate.
When Inheritance Tax is not due
Currently, if your estate is worth less than £325,000* there’s usually no Inheritance Tax to be paid. Also, if your estate is worth more than this and it is left to your partner/spouse, or an outside body, such as a charity, then no tax would need to be paid. However, you would still need to report the estate value to HMRC.
When Inheritance Tax needs to be paid
If your estate is worth more than £325,000*, and this is due to be left to your children, family members or friends, then this would be taxed on the amount above this threshold. For example, if your estate is worth £450,000, you would deduct £325,000 and the remaining £125,000 would be taxed at a rate of 40%*.
Note: There are slightly different rules if you leave your home to your children, whereby the Inheritance Tax threshold may increase to £475,000*.
There are ways to reduce your Inheritance Tax liability, including leaving part of your estate to a charitable legacy. You can also make your estate more tax efficient by using a trust, which can prove useful if you find that you need to pay for your care in the future.
By seeking independent financial advice, you will gain greater clarity over the true value of your property, possessions and money. Your Financial Adviser will also help you manage your assets, so you’re prepared for any unexpected costs, such as healthcare and care home fees. Part of the estate planning process includes writing a legal Will, so you can guarantee that your estate is inherited by the people you choose.
If you would like advice on estate planning, or you need to write a Will, then please get in touch today and speak to our team.
*All figures correct as of 19 March 2020.