Estate planning

27 July 2022

What is estate planning?

Estate planning sits alongside making your will as a key part of putting your affairs in order later in life. Working out the best ways to leave money in a will before you pass away can help to make the lives of your loved ones easier when you’re no longer around. It can also help protect your estate for the beneficiaries named in your will and reduce the impact of Inheritance Tax.

An estate plan clearly details your wishes to your loved ones about what you’d like to happen once you’re gone, how you’d like your estate to be managed, and other key considerations like how to leave a house to someone in a will.

Essentially, it’s estimating your net worth by listing your assets, minus any liabilities, and then making sure you have all the correct documentation in place to ensure the estate is distributed in line with your wishes after your death. Without the right documentation, like a will, trusts and lasting power of attorney, your wishes may not be legally binding.

Putting all this down into a detailed estate plan will help you gain an accurate overview of your assets and their worth. That, in turn, allows you to make informed decisions about provisions for your loved ones, such as how to leave a house to a child, and helps establish whether your estate will be subject to Inheritance Tax.

What is power of attorney?

A power of attorney is a legal document that lets you (the ‘donor’) appoint one or more people (known as ‘attorneys’) to help you make decisions or to make decisions on your behalf.

An enduring power of attorney (EPA) is a legal document that allows the donor to appoint one or more people (‘an attorney’) to help manage your property, money and financial affairs. The EPA was replaced with the ‘property and financial affairs lasting power of attorney’ (LPA) in October 2007. EPAs signed prior to that date are still valid and can be registered.

The LPA is far more flexible than the EPA. You have the option of taking out either a Property and Financial Affairs LPA or a Health and Welfare LPA – or both.

An attorney must be 18 or over (16 or over in Scotland). A person who is currently bankrupt is unable to act as an attorney on property and financial affairs, but can oversee health and welfare decisions.

Can the attorney give away the donor’s property?

The gifts must be of “reasonable value” and can only be given to friends or family members on a ‘customary’ basis. The attorney’s powers cease after you, the donor, have died.

You may want to consider making conditional gifts where your beneficiaries' inheritance has to meet certain criteria set by you.

What should your estate plan include?

There is more to estate planning than simply deciding who gets what from your inheritance. Here are some key areas to think about when it comes to supporting your loved ones over the long term.

Deciding how to leave a house to someone in a will isn’t easy, particularly as each beneficiary may have different needs. You should consider questions such as whether you need to name a new owner in your will, whether there is an outstanding mortgage which your heirs will need to pay, and whether to give someone a ‘right of residence’ at the home if they have specific needs.

If you give away a home as a gift while you’re alive, Inheritance Tax will only be payable if you die within seven years of making the gift.

Do you pay tax on property gifts?

Property gifts are considered a ‘potentially exempt transfer’ and the full 40% of Inheritance Tax will need to be paid should the donor pass away within the first three years of the transfer. The gift would become exempt on the 7th year.

Are Property Gifts Taxable

Taper relief reduces the tax on lifetime gifts if the donor survives at least 3 years. Find out more about taper relief here.

If you decide to live in your property once you give it away, you have the following options:

  • You pay the ‘proper commercial rent’.
  • You stay ‘rent-free’ with the consent of the new owners. This is known as a ‘Gift with Reservation of Benefit’, and will completely change the tax implications for you. It means that when you die, the house will fall back into your estate for Inheritance Tax purposes, even if you live for seven years after the gift was

The disadvantage of giving of away your property while you are still alive is that the new owner could increase the rent with due notice, end the tenancy agreement or sell the property without needing to ask your permission. 

You will need to provide a declaration of any cash gifts planned or given in the last seven years to protect against Inheritance Tax.

The value of your property’s share, whether you hold it as tenants in common or joint tenants, will be part of your estate’s valuation when it comes to calculating Inheritance Tax.

Your property

All property, including land and buildings that are located in the UK, can be left to a beneficiary in your will.

You can pass a home to your spouse or your civil partner when you die. There is no Inheritance Tax to pay if you do this. If you leave the home to another person in your will, it counts towards the value of the estate.

For a property that is owned as a 'joint tenant', you will have a half share in the home. This share will automatically pass to the co-owner on your death. If you own a property as ‘tenants in common’, you can control who will receive your share of that property.

Your other assets

Aside from your property, you will need to put together a comprehensive list of your assets to protect them for future generations. These include:

  • Your money
  • Your investments
  • Your possessions (from cars to jewellery)
  • Your pension fund
  • Insurance policies that may pay out upon death.
  • Savings in a bank or building society.

It’s important to get your assets valued on a regular basis so that you have an accurate picture of the total value of your estate, and the best way to leave your money and assets in a will.

Your funeral arrangements

Your will is an opportunity to express your wishes for your funeral arrangements and any financial plans in place for them. While your funeral wishes laid out in the will are not legally binding, it is reasonable to expect that your wishes would be respected.

Your assets will only be distributed to your beneficiaries once funeral costs, as well as taxes and other debts, have been paid. This may be referred to as the ‘residue’ of the estate.

Your ‘digital estate’

Increasingly, people are looking to leave a digital assets clause in their will, and thinking about digital estate planning more generally, as many of our most treasured possessions these days aren’t just financial or physical, but digital assets like family photos or a music collection. You may also want to specify what should happen to your social media accounts when you’re no longer around.

Best ways to leave money in a will

Making smart decisions about how to leave your house, money and assets to someone in a will can ultimately ensure your loved ones have less of a financial burden in the long term. For some context, Inheritance Tax is paid on the value of the deceased’s estate above a threshold – currently £325,000 – unless everything above that threshold has been left to a spouse or another exempt beneficiary such as a charity. The standard Inheritance Tax rate is 40%. If your estate is likely to be worth over £325,000, careful estate planning could help you reduce an Inheritance Tax bill.

If reducing your beneficiaries’ financial costs is your goal, here are some of the best ways to leave money, possessions and assets in a will.

Making gifts to family and friends – giving money as gifts while you’re still around, rather than leaving it in your will, is an effective way of reducing an Inheritance Tax bill. For example, you could give cash gifts of up to £3,000 in any one tax year, and the balance can be carried to the next tax year. For example, if Penny Smith transfers £1,500 in tax year 1, she can carry forward £1,500 and have a £4,500 exemption in tax year 2. However, any unused allowance is lost if not utilised in the next year; in short, it cannot be carried forwarded to year 3. This exemption applies to lifetime gifts. Some types of gift could be completely exempt from tax, including gifts between spouses or civil partners, and those given over seven years before your death.

Setting up a trust fund – these are usually associated with providing money to people who are too young to be financially independent, and can be set up for someone at any time in their life. They provide payments to family members, which can allow them to start receiving their inheritance early.

If your life policy is not held in trust it will normally be considered part of your estate and can therefore be subject to Inheritance Tax. There are exceptions; for example, if you hold a joint policy, the cash sum could be paid to the survivor on the death of the first party. Putting your Over 50s Life Insurance policy in trust should mean that the money paid out from your insurance will not be part of your estate. You can find out more about trusts at our Online Trust Hub, or read about our new Digital Trusts, which can be completed entirely digitally and don’t require a signature.

Inheritance Tax regulations can change at any time, and the rules around tax, gifts and trust funds are complex, so it’s a good idea to consult a professional financial adviser and a solicitor before making any decisions.

You can also plan ahead with our Over 50s Fixed Life Insurance

Our Over 50s Fixed Life Insurance could allow you to leave a fixed cash sum to your loved ones when you pass away, which could be used to help contribute towards your funeral costs or be left as a gift. If you are looking to leave a sum to help contribute towards funeral costs you could choose to add the Funeral Benefit Option to your plan. Terms and Conditions apply.