Estate Planning: Key Strategies and Considerations

Wednesday 24 July, 2024

Estate Planning is complex and can be particularly challenging for high-net-worth individuals.

Therefore, in today's complex financial landscape, effective planning for your future is not just prudent—it's essential. As trusted financial advisers, we understand the importance of safeguarding your assets and ensuring your wishes are met.

In this comprehensive guide, Independent Financial Adviser, Deb Nolan, based at our Leeds office, looks at the intricacies of estate planning, highlighting several strategies and considerations to bear in mind when planning your estate:

1. Use Allowance Considerations for Estate Planning

• Annual Allowances: Maximise your annual gift allowances to reduce the value of your estate for inheritance tax (IHT) purposes.
• Small Gifts: Utilise small gift allowances, allowing you to give up to £250 to any number of people each tax year, provided they have not received another gift from you that year.
• Gift Allowance: Up to £3,000 can be gifted.  If this is to one person and they cannot receive the additional £250 under Small Gifts. 
• Gifts in Contemplation of Marriage: Consider making gifts in contemplation of marriage i.e. before the marriage takes place, which are exempt from IHT.  Your children can receive up to £5,000 with other relationships being lower amounts.

Making Regular Gifts Out of Surplus Income:

Making regular gifts out of your surplus income can also help reduce your estate’s value:

• Record Keeping: Maintain detailed records of these gifts.
• Definition of Income: Understand what counts as income to ensure compliance.
• Establish a Pattern: Establish a consistent pattern of gifting.
• Children's Pension Contributions: Consider regular contributions to your children's pension plans.

Remember to complete an IHT403 form to account for gifts over the previous seven years.

2. Caution with Attorney Gifts

If you have, or are an Attorney, be cautious about allowing Attorneys to make gifts on your behalf, as they must act within strict legal guidelines. This may require Court approval. These include:

• Capacity and Consent: The individual must have the mental capacity to understand the implications of making gifts. If there are doubts about their capacity, a court may intervene to assess the situation and determine if the attorney's actions are appropriate.
• Best Interests: Any gifts made by an attorney must be in the best interests of the individual. This involves considering factors such as their financial needs, obligations, and overall welfare.
• Court Approval: Depending on the jurisdiction and the amount of the proposed gift, court approval may be required. This process ensures that the attorney's actions are scrutinised by a legal authority to prevent any potential misuse of the individual's assets.
• Documentation and Accountability: Attorneys must maintain meticulous records of any gifts made on behalf of the individual. These records serve as evidence of proper stewardship and adherence to legal guidelines.
• Legal Standards: The court reviews the proposed gifts against legal standards to ensure they comply with the relevant laws and regulations governing estate planning and financial management.

3. Capital Gains Tax (CGT) Considerations for Estate Planning

• Potentially Exempt Transfers: Potentially Exempt Transfers (PETs) can be an effective strategy to reduce the value of your estate without immediate inheritance tax implications, provided the donor survives for seven years after making the gift. However, when incorporating Capital Gains Tax (CGT) considerations into estate planning, it's essential to understand the interplay between PETs and CGT.
• Taper Relief: For large gifts, taper relief may apply if you survive between three to seven years after making the gift, reducing the IHT liability.

4. Create Lifetime Trusts when Planning 

Lifetime trusts can offer several advantages:

• Holdover Relief: You may defer Capital Gains Tax on assets transferred into a trust.
• Flexibility: Trusts provide flexibility in managing and distributing assets.
• Streamlining Estate Planning: Trusts can streamline the management of your estate.

However, be mindful of compliance requirements and associated costs.

5. Set Up a Family Investment Company (FIC)

FICs can provide significant benefits, including greater flexibility and control over assets compared to trusts. They are not subject to the same limitations and can be a suitable option for substantial estates, typically in excess of £3 - £5 million. However, FICs are not suitable for everyone and require careful consideration.

6. Consider Inheritance Tax when Undertaking Estate Planning

Inheritance tax planning offers a variety of options to mitigate your tax liability. It's essential to seek professional advice to navigate the complexities and choose the best strategies for your situation.  

7. Prepare Suitable Wills

• Trusts and Control

Preparing suitable wills and incorporating trusts into estate planning can provide structured management of the estate, optimise tax reliefs, and protect assets. However, it is important to balance these benefits with the potential loss of direct control over the assets placed in trust.

• Business Property Relief (BPR)

Consider BPR on death and the use of trusts upon the first death to manage tax liabilities effectively.

8. Utilise Nil Rate Bands

When drafting wills, consider using the nil rate band on the first death to optimise the tax position. Be aware that if the nil rate band is used on the first death, it will not be available for the second death. Ensure that more than two nil rate bands are available for the estate and residence, and stay informed about potential legislative changes.

9. Trusts Over Residue

Trusts over the residue of your estate can facilitate further planning, even if there are capacity issues. This approach also supports next-generation planning. 

10. Deeds of Variation

Deeds of variation remain a valuable tool, allowing alterations to the distribution of an estate within two years of death. This can also be applied to intestacy scenarios, providing flexibility in estate planning.

11. Nomination Forms

Ensure your pension and life assurance nomination forms are up to date. These forms indicate who the beneficiaries of these assets potentially could be and can significantly impact your estate planning.

Leeds based Financial Adviser Deb Nolan says that:

"Estate planning is a multifaceted process that requires careful consideration and professional advice. By utilising different strategies, you can effectively manage your estate and minimise tax liabilities, ensuring your assets are distributed according to your wishes. Legislation has and will change in the future and some strategies previously used should be reviewed and updated where appropriate."

Normally, Lonsdale Wealth Management Financial Advisers would work with your Solicitor or Accountant to enable appropriate individual strategies. 

Please note that not all these strategies will be appropriate to you and The Financial Conduct Authority does not regulate all of them.

Investment Risks: The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and customers may not get back the full amount invested. Views and opinions are based on current market conditions and are subject to change. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Past performance is not a reliable indicator of future performance. 

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