How to ensure your assets go to the right people and save potential inheritance tax

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The majority of us are guilty of procrastinating. More often than not, when faced with dealing with something we don’t want to do, or we find difficult to talk about. Death is one of those taboo topics that most people understandably find incredibly hard to discuss as it can bring up a lot of feelings such as anxiety, fear, awkwardness and sadness. As a culture, we have a tendency to ‘pretend’ that it's not going to happen. Which is why, in a survey carried out by Royal London, they found that:

• More than half of adults (56%) in the UK don’t have a valid will, rising to 79% for 18–34-year-olds.
• Of those who don’t have a will, 47% see the value, but haven’t got around to making one
• Six in ten (62%) people haven’t reviewed their will in over a year, with three in ten (29%) leaving it more than 5 years

Interestingly, the COVID pandemic (according to a Freedom of Information request) saw a rise in DIY wills that has subsequently resulted in an increase in attempts to block the legal process of dealing with someone’s assets on death - known in England and Wales as probate - with a 37% jump in challenges to the distribution of inherited estates in English and Welsh courts and tribunals service centres during 2021 when compared to 2019.

Don’t leave it to the State to decide who gets your assets

If you don’t clarify your wishes in a will, the law will take over and distribute your estate according to a formula set out in the rules of intestacy. In this instance, the outcome is not always what you would expect and can also potentially create unnecessary tax consequences.

Additionally, a will can also be used in the initial planning to help reduce your inheritance tax (IHT) liability. Of course, making a will is not the only thing you can do to help pass on your assets to the right people and save potential inheritance tax.

What else can you do to mitigate IHT liability?

If your estate has a potential inheritance tax liability, the people you want to leave your assets to, i.e., your beneficiaries, are the people who ultimately will have to pay the IHT bill. This may not be the kind of legacy most people think of leaving behind.

IHT is paid on the value of assets (above the IHT threshold) that a person leaves behind when they die. It can also apply to some gifts and transfers that are made before someone dies.

If you are married, or have a civil partner, you are able to leave your entire estate to your spouse or partner free of IHT.  But if you want to leave some or all of your estate to family and friends, then it may be liable for IHT. You also, of course, may need to consider, as part of your estate planning, what happens when the second spouse/partner dies. This is something that many families can overlook. The earlier you put plans in place, the more options you may have.

The rules around IHT can be complex, and the amount of tax, and even the overall rate that will be paid will depend on how your finances are structured during your lifetime, how you dispose of your assets and to whom you leave them. Seeking independent financial and tax advice can help you pass your assets to the people you want to benefit and potentially mitigate some or all of the IHT liability. With the right planning and support some of the IHT receipts currently payable are thereby able to be legitimately mitigated or reduced.

Even though death is an uncomfortable discussion, procrastination could cause unforeseen issues down the line. Getting your affairs in order earlier and regularly reviewing them can go a long way to making sure your loved ones receive everything, according to your wishes, and without paying unnecessary taxes.

At Armstrong Watson our quest is to help our clients achieve prosperity, a secure future and peace of mind. We provide bespoke tax planning, financial planning and wealth management all under one roof. Please note, advice on IHT related matters could be provided by a mixture of both our financial planning and tax specialists.