6 practical ways we can help you with your estate planning


In last month’s newsletter, you read about the issue of retirement planning. This month, you’ll find useful information as we take a similar approach to the subject of inheritance and estate planning.

In 2020/21, £5.32 billion was paid in Inheritance Tax (IHT). That figure is expected to go up each year as many more people become liable for IHT because of increasing property values and a long period of investment growth.

The freezing of the IHT nil-rate band at £325,000 until at least April 2026 is also likely to have an impact.

There are, however, some simple estate planning steps you can take to ensure that as much of your estate goes to who you want it to, rather than HMRC.

Here are six key estate planning issues, and details of how Charlton House can help with your estate planning.

1. Understanding how IHT is charged

Inheritance Tax (IHT) is generally described as being the most hated tax – primarily by those who fear having to pay it.  In order to manage the amount your estate has to pay, it helps to have a good idea of how it’s charged and how it can impact the value of your assets when you die.

IHT is payable by your beneficiaries at 40% on the value of your estate above the nil-rate band (NRB). The current NRB (2021/22) is £325,000. If you’re non-UK domiciled, this applies to your UK estate only, but if you’re UK-domiciled it applies to your worldwide estate. We wrote an article recently that explains this in more detail.

On top of that, each person has a residence nil-rate band (RNRB), which is £175,000 in the 2021/22 tax year. Note that, in order to use the RNRB, the property must be passed directly to your children or grandchildren.

If you’re married, all your assets will pass to your partner with no IHT payable. This is known as the “spousal exemption”.

You should note that full spousal exemption only applies in the case of a couple who are both UK domiciled.

If either you or your spouse is non-UK domiciled, then the situation is more complicated, and we would strongly recommend that you take advice from a financial planning expert in these circumstances.

2. Using gifts to reduce IHT payable

There are some things you can do that will immediately reduce the amount of IHT payable when you die.

These all involve giving money away, so shouldn’t be done without careful planning to ensure that it won’t negatively impact your own plans.

You can make certain relatively small gifts that are immediately outside of your estate. These include:

  • Your annual exemption, which are gifts of up to £3,000 per year
  • Gifts in respect of a wedding; Up to £5,000 to a child (including step and adopted) from parents, £2,500 to a grandchild or great-grandchild, and £1,000 to anyone else
  • You can also give up to £250 a year to anyone who has not received either of the other IHT-free gifts from you.

3. Making use of PETs

Beyond the allowances highlighted above, other gifts are considered to be “potentially exempt transfers” (PETs).

You can give any amount away that you like as a gift. The key thing to bear in mind is that you will have to live for seven years for the full amount to be outside of your estate.

The full rate of 40% IHT is payable if you pass away during the first three years after making the gift, but it then “tapers down” by 8% each year until, after year seven, no IHT is payable.

Given the “seven-year rule” it makes sense to start planning as early as possible to reduce the chance of IHT being payable on PETs.

Using a cash flow forecast can be a useful way of planning more substantial gifts to make sure that any gifts made don’t impact your other financial objectives.

4. Putting assets under trust

Trusts are legal structures into which property or other assets are passed from yourself to the trustees. The trustees will then manage the assets on behalf of whoever you determine is the beneficiary.

The key point, from an IHT point of view, is that once assets form part of a trust, and subject to the seven year rule, they may no longer be included in the value of your estate for IHT purposes.

Trusts can therefore be an effective way to distribute wealth to your chosen recipients and help reduce the value of your estate that will be liable for IHT.

Common trusts used for estate planning include:

Bare trust

This is the simplest form of trust, where assets are held by the trustee until such a time as the trust stipulates they are to be passed to the beneficiary. Bare trusts are commonly used to pass assets to children until they reach a certain age.

Discretionary trust

Under a discretionary trust, the trustee has discretion over who the assets are paid to, and how and when. For example, if the assets in trust are meant for children, the trustee can decide if a lump sum or regular income is most appropriate.

Discounted gift trust

A discounted gift trust is commonly used when assets such as investments are put under trust, but you still want access to the assets.

Excluded property trusts

If you are non-UK domiciled you can settle non-UK assets into an offshore trust UK for future IHT planning. Assets held in this way are ring fenced and will not be subject to IHT should you eventually become domiciled in the UK.

5. Making sure you have a will in place for each tax jurisdiction

Making a will is one of the simplest financial actions, yet research shows that nearly 60% of people in the UK currently don’t have one.

This means they will die “intestate”, and their family will have no say over how or when their assets are distributed.

By making a will, you ensure that your wealth passes to the people you want it to. It also means that your assets can be distributed in a timely manner, and legal wrangling can be avoided.

If you are married or in a civil partnership, your spouse or partner should make a will too.

One key issue if you’re an expat is that a will gives you the opportunity to state clearly who you want to be the guardian for your children.

We would also recommend that you consider having a separate will for each jurisdiction where you have a financial interest. So, if you have assets in both Hong Kong and the UK, have a will for both.

6. Developing a strategy for taking your income in retirement

Your savings and investments may be subject to IHT when you die. But it’s unlikely that your UK pension fund will be.

It can therefore make sense to have an income plan that prioritises taking money from savings and investments, and therefore reducing your IHT liability.

However, there’s a lot to think about when it comes to such planning, such as the tax position of your potential beneficiaries, so taking expert financial advice is important.

Get in touch

When it comes to estate planning, mistakes can prove costly and can often be irreversible. Having assets in both Hong Kong and the UK can also add an extra layer of complexity.

We can help you with all aspects of estate planning and are uniquely placed to support you, with offices in the UK and Hong Kong.

Please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.

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