Six estate planning tips

As Benjamin Franklin put it: nothing can be said to be certain, except death and taxes. But with a good estate planning strategy, you can do something about the latter, at least.

| 8 min read

What is estate planning and why is it important?

Estate planning is the process of structuring your wealth and taking advantage of your tax allowances to minimise your estate’s inheritance tax (IHT) liability.

Your estate isn’t just cash in the bank or the value of your home – it’s a total figure of your accumulated assets. It includes:

  • Savings
  • Property and land
  • Investments
  • Accounts such as ISAs or pensions
  • Antiques and furniture
  • Debt

Between April 2023 and January 2024, HMRC raked in £6.3bn in inheritance tax (IHT). Although designed to catch the wealthiest, the rise in property prices has seen the number of families affected increase to about 30,000 a year with each family paying an average £238,000.

With tax allowances now fixed until April 2026, and with governments looking to increase revenues following the COVID-19 pandemic, all these figures are expected to rise.

Here are some of the most effective estate planning strategies you could use to minimise IHT liability and structure your estate to make sure your beneficiaries get as much as possible when you die.

Six estate planning tips

1. Give some of your wealth away now to avoid IHT

Most people are aware of the seven-year rule: that if you pass on a gift of wealth and live for another seven years it falls outside your estate when calculating IHT. But there are some gifts (known as exemptions) that are immediately outside your estate from the moment they are given.

Transfers between spouses and civil partners are tax free. And there is a range of relatively modest gifts that are immediately treated as outside of your estate. Everyone can gift £3,000 per tax year and there are other exemptions such as gifts for weddings and you can make any number of gifts below £250, providing they are to different people, and they haven’t benefitted from any other gifts from you in the same tax year.

But the most important exemption is the “gifts out of surplus income rule”. This means, if you have enough income to fund your day-to-day expenses with enough to spare, you can gift this away without creating an IHT liability. This can be a really useful piece of estate planning because you can use it to:

  • Support school fees for your grandchildren
  • Contribute to JISAs for their future wellbeing
  • Contribute to ISAs if they are over the age of 18
  • Contribute to a SIPP but they need to be on top of their personal allowances

But you need to keep good records to ensure your executors can demonstrate the money has genuinely come from your income and you have not had to touch your capital.

2. Use specialist investment strategies that have IHT reliefs

A second IHT regime refers to assets that are potentially relieved of IHT. This means they attract a reduced level of IHT or zero IHT.

Investing in smaller companies – the growth engine of the economy – is an example of this. They make use of something called business relief.

You must hold the investments for at least two years before your death for this to work. And unlike other forms of estate planning, you still have full access to your wealth if you need to draw on it. However, their share prices can vary significantly, and they can sometimes by difficult to sell at short notice. This makes them high risk investments and they should only be used as part of a wider investment strategy.

Agricultural land and woodland can also be passed on free of IHT but there are complex rules, especially for agricultural land/property.

Some trusts are also helpful but they can be expensive and complex to set up and once established can be hard to change.

3. Ensure your pensions are utilised correctly

A little-known piece of tax legislation: your pensions are outside your estate and can be passed on free of IHT. They are also not covered by your will. To make sure your pension savings pass to your preferred legatees, you need to complete something called a nominations form. This tells the pension provider who you want the money to go to and in what proportions. You probably filled on in when you took each scheme out but it’s a good idea to keep them up to date as your life changes.

Divorce, second marriages, the birth of children and grandchildren are all reasons to review your nominations to make sure the right amounts of money go to the right people.

If you die before the age of 75, anything left in your pot is inherited tax free. If you die after the age of 75, anything taken from your remaining savings is taxed as income.

4. Leave something to charity

If you leave at least 10% of your net estate to a registered charity, it reduces the effective IHT rate on the rest of your estate to 36% from 40%. If you’re looking for estate planning ideas that also help to make a positive impact on the world, consider donating to one of your favourite charities.

5. Make sure your wishes are protected

An absolutely critical piece of inheritance planning is a will. It helps your executors carry out your wishes and stops any arguments within the family and other legatees once you are no longer around.

Dying without a will (“intestate”) leaves it to the courts to decide how your wealth is to be divided. This might not be in the way you expect and it might not be in a way you would choose.

This is particularly important if you are divorced and have remarried. A new marriage renders all previous wills void. And if you are in a domestic partnership that is not legally recognised (such as marriage or civil partnership), your partner could get nothing at all.

You should also consider a lasting power of attorney to provide the comfort that someone you trust is looking after your interests if you were to be incapacitated in any way.

If you own a business, you can also put a business power of attorney in place, nominating a professional, peer, or colleague, to manage the company in your absence. This takes the strain off the family at a time when they may not have the skills or emotional strength to pick up the reins on your behalf.

6. Seek estate planning advice

IHT can be a complicated labyrinth to navigate no matter how much wealth you have. Some strategies are more complex than others and all of them have to be considered in relation to your current and future financial needs.

Speaking to a financial professional can help clear things in your mind. They can help you structure your wealth in ways that minimise your estate’s IHT liability, maximises your legacy to provide benefits to your loved ones while you are still alive. But the most important thing is to make sure you can afford the retirement you have worked all your live to achieve.

The most important thing to do is speak to the family about your plans and intentions and to discuss the best way forward for the family unit. Passing wealth to the next generation can have IHT benefits but you need to balance the scales and make sure no-one is upset by your actions. Gifting some of your wealth to some of the family now could be seen as favouritism; everyone needs to understand the bigger picture.

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