It’s perhaps not something any of us want to think about, but making plans for what happens after we’re gone is extremely important. Data from the Office for National Statistics suggests the average life expectancy at birth in the UK is 79 years for men and 82.9 years for women. But however long you’re here for, it’s crucial to ensure your affairs are in order. That way, your loved ones are not left with the headache of sorting out your estate on top of dealing with their loss.
That’s why you need sound estate planning, but what exactly does it involve, what are the benefits and what are some of the tax implications you need to consider? Read on to find out more.
What is estate planning?
Estate planning enables you to determine what happens to your assets when you pass away. These could include any money saved in your bank accounts, any properties under your name as well as any possessions such as vehicles, jewellery or antiques.
For the majority of people, these assets will be passed on to their loved ones and estate planning means you can decide exactly who gets what. This is done by creating a Will to be honoured after you pass and/or by appointing a Lasting Power of Attorney to make decisions on your behalf if you are left incapacitated by illness or injury.
Why is estate planning so important?
It means there should be no arguments about who receives what, because your wishes have been set out in a legal document. It is not always the case, of course, but in theory it should remove any risk of family disagreements, which can make an already painful process all the more distressing.
On top of that, if you were to pass early and leave young children behind, estate planning means you will have appointed a legal guardian to look after them in your absence. Without that, the courts will have to decide who is responsible for their care. Meanwhile, having a plan allows you to pass on your assets in the most tax-efficient manner.
How does inheritance tax affect estate planning?
Under UK law, there is no inheritance tax to pay on the first £325,000 of your estate. Anything above that threshold is taxed at 40%. So, as an example, let’s say your estate was worth £400,000. The first £325,000 would be tax-free and 40% would be charged on the remaining £75,000 (£30,000), meaning your beneficiaries would receive £370,000 in total.
However, there is typically no tax to pay if you leave everything to your spouse, civil partner, a charity or an amateur sports club – even if your estate’s value is higher than the threshold.