This article is part of Morningstar’s Guide to Financial Planning, your handbook for making the most of your tax-free investing opportunities, reducing your annual – and lifetime – tax bill while keeping HMRC onside.
Emma Wall: Hello and welcome to the Morningstar Series, 'Ask the Expert.' I'm Emma Wall and here with me today is Ian Dyall, Head of Estate Planning for Towry.
Hello Ian.
Ian Dyall: Hi there.
Wall: So we are here today to talk about estate planning. We thought we'd go right back to basics and start with the importance of writing a will?
Dyall: Well, wills are fundamentally important because obviously estate planning is really about how you pass on your assets to the people that matter to you and the only control you've really got over that is your will. So although the will is important for passing down the assets, it can also be used as a tax planning vehicle as well.
So for people maybe have been widowed in the past by structuring their will in the right way, they can actually capture potentially additional nil rates bands that may have been left to them by deceased spouses. So not just in terms of controlling the assets, but also the tax planning vehicle, the will is fundamentally important.
Wall: Say the worst happens, and you know, you are not able to make a will, who is exempt from IHT, because the spousal exemptions in there even if you don't make a will?
Dyall: Yeah, so within the will any gifts to spouse or civil partnerships are exempt, any gifts to political parties are exempt, any gifts to the nation, so if you leave, for example, land or property to the National Trust and gifts to charities, and there is some further legislation that says that if you leave more than 10% of your net estate to charity, broadly speaking your estate less than the rate band, then the balance of the estate will benefit from a 36% tax rate rather than the 40% tax rate. So again there is some planning you can do within the will for those who wish to be philanthropic with their assets.
Wall: The will – if you forgive the phrase – is the end of the road for IHT planning, let's think about what you can do now. So while you are alive, you can gift a certain amount away per year and that will reduce your estate and be free from tax, won't it? In what instances can you gift?
Dyall: People can gift at any point really. I mean the question is how that gift will be treated. So there are certain gifts which are exempt that are immediately exempt, so if I make them this morning and die this afternoon, they will be exempt.
So the key ones there I suppose would the annual exemption of £3,000; gifts so in consideration of marriage, so, if my daughter gets married, I can give £5,000 or my granddaughter £2,500.
Gifts at normal expenditure, so any gift of any size is exempt provided; A, it comes from income; B, its regular in nature, so it's not one-off gift; and C, it doesn't affect your standard of living; and then gifts between spouses.
But if I want to gift beyond that, I can still do that, it just means that following that gift, that gift has to be outright and must live for seven years, so that would typically be treated as potentially exempt until that seven year point.
Wall: I think that's something that a lot of people don't know, they assume actually there are restrictions on being able to gift your loved ones, but actually as you say, if they are absolute, there aren't those restrictions.
Dyall: Correct. I mean, anytime it is restricted, if you are going to use trusts, there are limits on how much you can put into trusts these days, without creating a lifetime tax choice, so you need to be careful with that.
But many people forget the basics, many people look for product driven solutions as opposed to some of the simple solutions like gifting money outright to their children or even spending money to some extent.
Many people forget about spending too – I'm not saying spend for the sake of it, but many people when they get to later on in life, it's very difficult for them to get out of the mindset where they saved all their life and see their net worth going up.
So a point where they feel comfortable spending their capital and seeing the net worth going down. Because no matter how wealth they are, there is a nagging doubt at the back of their mind saying, will I need this money or not? But some of those solutions could be the best solutions and very simple solutions frankly.
Wall: You've talked a little bit there about creating trusts, I mean, how would one go about that? Is that the sort of thing that you need professional help with?
Dyall: Yeah, it's not just which is the correct trust, it's who should fund it. If you are using multiple trusts, there is a right and wrong way to go there.
So, it is a more complex area, but often for most people the best solution is a combination of outright gifts, trusts – as trusts really have the big advantage of protecting assets. Unlike an outright gift, with a trust you've got some control over potentially who benefits? When they benefit? What they benefit from? How the money is invested in the meantime?
So the question is, how important are those protective benefits? So do you have a daughter who is about to get divorced? Do you have a son, whose business is about to go bankrupt and you're worried about losing money through bankruptcy.
Have you got beneficiaries who are long-term sick and then going to need protection throughout their life? So that's where trusts are really useful is protecting assets in those circumstances.
Wall: So to round up; make a will, be generous with your loved ones and don't forget to spend on yourself.
Dyall: Absolutely.
Wall: Ian, thank you very much.
Dyall: No problem.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
