Although an often-sensitive topic, leaving an inheritance is a common aim for many people in the UK. According to research by Canada Life, nearly half (46%) of UK adults hope to pass down their wealth and provide financial security for their loved ones. Despite this, 51% of people do not have a will or a comprehensive estate plan in place.
One reason for not having a plan in place may be a lack of understanding about the potential costs of leaving an inheritance. In some circumstances there is inheritance tax to pay if you give away your home and assets. And the process of transferring wealth can get even more complex in the absence of a valid will.
What is inheritance tax?
Inheritance tax (IHT) is a tax on the value of an individual's estate (property, money, assets) upon their death. In the UK, an inheritance tax of 40% is charged on estates worth over £325,000. This means that if your estate is worth more than this amount, your loved ones may be left with a significant tax bill to pay within six months after you pass away. The tax from your estate is paid to HM Revenue and Customs (HMRC) by the person dealing with the estate, known as the ‘executor’.
However, there are several strategies that can be used to reduce the impact of inheritance tax:
- Gift your wealth to loved ones during your lifetime. As long as you live for seven years after making the gift, it will not be subject to tax.
- Make use of the nil-rate band. The nil-rate band is the amount of money that can be left to beneficiaries tax-free (currently £325k). By giving away a portion – or all – of your estate during your lifetime, you can ensure it is valued below the threshold, so no IHT will be payable.
- Consider tax-efficient investments, such as ISAs and pensions. By investing in these, you can reduce the amount of IHT payable on your estate.
- Donate 10% of your estate to a registered charity to reduce your inheritance tax to 36%.
- Consider setting up a trust in which your life insurance policy or wealth is held for loved ones. This can help reduce the value of your estate and therefore the amount of payable tax.
Another reason for lacking a plan may be due to little knowledge around the advantages of leaving an inheritance. In addition to giving loved ones’ financial support, leaving an inheritance can be a chance to help charitable organisations that are dear to your heart. According to key findings from the Remember A Charity consumer benchmarking study, one in five donors now write charity into their will.
Saving to leave a legacy
As with many reasons for saving, saving to leave a legacy often involves careful planning and consideration. Creating goals, assessing your financial situation, and establishing a budget are the first steps to getting your affairs in order. To get started, you can ask yourself these questions:
How much do I want to leave to my family, friends, or a charity?
Determine how much you want to pass on and calculate how much your current assets are worth. Then you can set some realistic goals, create a saving strategy, and adjust your expectations if necessary.
Can I invest my money wisely?
Weigh up how much risk you are willing to take versus how much you want in returns. Putting money into savings accounts will provide a safety net for your wealth while still earning interest. Investing your money in stocks, bonds, and other assets is riskier but has the potential to grow significantly over time. Creating a diverse investment portfolio can often help you increase your wealth whilst having some level of protection.
Do I need professional estate planning support?
You might feel more comfortable seeking professional advice from a financial adviser or estate planner. These experts can help you create a will, trust, or other legal documents that specify how your assets should be distributed. They can also provide guidance on saving strategies.
What is included in an estate?
- Life insurance or assurance policies
Saving to leave an inheritance is a noble and rewarding deed, however it can also be overwhelming. With several costs and strategies to bear in mind, starting the process early can help you better provide for your loved ones after you are gone.
Flagstone’s mission is to support you with your saving aspirations. Our platform helps you protect and grow your wealth, so you can be sure your money is working for you.