I think it’s helpful to have an understanding of the tax system around legacy planning, but to do so here would take a long time and you’d be bored. So what follows is a whistle-stop tour of the highlights, OK?
Understand Tax
Inheritance tax is the biggie here. Quite simply, when you die, everything you own is added up. Anything you owe is taken off. Then whatever’s left is totted up -your potential taxable estate. If what you have is more than a certain figure, called the nil rate band, then inheritance tax is charged at 40% on the rest.
That’s quite steep, but there are, fortunately, many exceptions and exemptions. For instance, if you leave everything to your spouse or civil partner, then there’s never any IHT to pay. Note our society still rewards commitment, so you’ll have to have a marriage or civil partnership certificate; a common-law partnership won’t cut it. The system we live in rewards marriage, and now civil partnership.
The tax-free amount is called the nil rate band, and is £325,000 per person. If you’re married or in a civil partnership and you leave everything to each other, then on the second death your partner would get your nil rate band, so they would only pay inheritance tax on their estate if it is valued above £650,000.
There’s an additional nil rate band called the Residence NRB, and that is currently £175,000 per person. It applies if you have your own property, although there are all kinds of rules about how that applies and it may not apply to you at all if your estate is over £2million. There are also stipulations about leaving your house to direct descendants, so that might rule out leaving your property in trust.
You can make gifts before you die, but in order to stop people giving everything away on their death-bed, there are timing issues. For instance, you have to live seven years after the date of gift for there to be no inheritance tax implications at all from the gift. If you die within seven years, there may be tax to pay.
There are exemptions such as the small gifts exemptions, which says that you can give as many gifts of less than £250 per person as you wish, with no implications. The gifts from income exemption which says that as long as a gift is made regularly and doesn’t impact your standard of living, you can give without limit from your income, so you couldn’t sell your share portfolio to use this rule.
You can make one annual gift of up £3,000 (that can be divided between donees, say £1,000 to each of three kids) and there’s no implications there. And there are rules about giving for special occasions such as weddings.
There are exemptions if you own agricultural or business property, and the latter can include shares in a qualifying company – that’s particularly beneficial to small business owners and farmers. And don’t get me started on trusts which have their own set of rules but which are incredibly powerful vehicles, though they always require some sacrifice.
The problem is that tax rules change fairly frequently! Get to know the tax rules around this subject, as it’s actually quite a bit simpler than it might seem. Remember the starting point is your wishes, then you have to navigate the system – with professional help if needed – to get the job done.
Don’t Neglect LPAs
The final thing is that all the while you’re working out your wishes for after you’ve gone, and indeed thinking about establishing legacies while you’re alive through gifts, you should also make provision for what might happen if you can’t direct your own wishes any more.
As cheery as it doesn’t sound, today might be your last day of being mentally capable to do this. A stroke tomorrow, or rapid-onset vascular dementia might mean your wishes never get outworked because you don’t have the capacity to see them through.
The fix for this is a Lasting Power of Attorney for your Property and Financial Affairs, and while you’re at it get the LPA for Health and Welfare too, which gives another person the ability to make decisions your medical and long term care.
I did a Five Minute Friday video on LPAs, so I’ll make sure there’s a link to that in the notes. Having an LPA in place, combined with clear direction for your attorneys in written form, will go a long way to making sure whatever you want to happen before you pass away, actually does happen.
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