Editorial Team
AUTHOR Editorial Team| CREATED 18 Jan 2016
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5 steps to making the most of your legacy

Inheritance tax is becoming an issue for an increasing number of people in the UK. Here are five smart steps you can take to ensure your money ends up with your loved ones and not the taxman.

None of us likes to entertain the thought of our own death and what would happen to our family. However, a financial plan for what happens after your death is vital, especially if you have dependants. With UK inheritance tax potentially having the right to pocket up to 40% of your estate, it pays to be smart when planning your legacy.

Here are five steps you can take to ensure as much of your wealth as possible is passed on to your loved ones.

1. Make a will

In the UK if you don't have a will your estate will be distributed according to rules set out by law. These are known as the 'Rules of Intestacy'.

For example, in England and Wales, if you're married with children, the first £250,000 of your estate (plus any personal possessions) would go to your spouse. The remainder would be split 50:50; half going to your children when they reach 18 and the other half used to generate an income for your spouse, passing to the children on your spouse's death.

If you're not married your estate will go to your blood relatives, even if you've been living with someone for several decades. This could be far from what you wish. Think about where you want your money to go and why. A will makes your wishes concrete and clarifies who should get what, but can also be reviewed over time.

2. Making use of life insurance

Life insurance can play a big part in your inheritance tax (IHT) planning. Rather than reduce the liability, by taking out a plan to cover your estate's potential IHT liability and writing it in a trust, the payout will be available quickly to meet any bills. More importantly, by putting it in trust it will be outside your estate and will not be liable for IHT at 40%.

Remember, the younger you are when you take out cover, the cheaper the premiums will be. Find out more about life insurance here.

3. Give it away

Giving your wealth away to another individual whilst alive will also save on IHT.

Some gifts are immediately outside your estate. You can give as many people as you like up to £250 each in any tax year. If you want to give larger gifts, either to one person or several, the first £3,000 of the total amount you give will be exempt from tax.

You can also make a regular gift as long as it is out of your income and doesn't affect your standard of living. For example, if you don't spend all your salary or pension each month, you could redirect any funds that are left over to another person. The gift does need to be regular, which could be a birthday or Christmas present, perhaps, or a monthly payment.

A wedding can also be a good excuse for an IHT-exempt gift. A parent can give up to £5,000, a grandparent £2,500 and anyone else £1,000.

4. Make an investment and use a Trust

This could be useful if you wanted to give some money to, for example, your children or grandchildren but feared they might not spend it wisely during their teenage years. Or, if you wanted to give away capital while keeping control over how it is managed and, in some instances, still being able to receive an income from it.

Tax charges can also come into play on the money placed in trust, but generally if this remains below the nil-rate band you won't need to pay any tax, but in many cases the level of tax suffered will be less than the 40% headline IHT rate.

5. Make IHT-exempt investments

If you don't want to give your money away, IHT-exempt investments may well be worth considering. These include commercial forestry and farms, but the most common are shares listed on the Alternative Investment Market (AIM). After two years, these are outside your estate for IHT purposes. Talk to your financial adviser for more detail on this and any other options highlighted in this article. 

If you have a financial adviser, speak to them about how they can help you with IHT. If you don’t have an adviser and would like to find one in your area, check out our ‘Find an Adviser’ tool.


Editorial Team

Old Mutual Wealth Expert in Finance, Protection, Investments, Pensions