Writing a Will – How to protect your family and your financial assets
Nobody wants to think about dying. However, most people want their loved ones to benefit from their assets after they die. The best way to achieve this is to write a Will that details exactly who you want to receive any benefits and what they should get.
We recommend getting a solicitor to draw up your Will to ensure it covers everything and does not contain any mistakes that may delay or disrupt inheritance. However, when it comes to managing your financial assets so you can pass them on tax-efficiently, we can advise you in a number of areas.
When passing on your pension, the Expression of Wish or Nomination of Beneficiaries form is crucial. You should always take professional advice to ensure it is clear and up-to-date regarding who should benefit.
Keeping your pension outside your estate
Pensions are not usually considered to be part of your estate when you die, which means they are normally exempt from Inheritance Tax. Whilst your money is sitting in your pension fund, it will always remain outside of your estate. Any money that you draw out of your pension will be added to your estate and maybe subject to inheritance tax.
Final salary v personal pensions
Different types of pension scheme have different advantages and disadvantages. Final salary pensions provide guaranteed benefits, but they can have more restrictive rules on who can be the beneficiary and how the benefits are taken.
On the other hand, personal pensions allow anyone to be named as a beneficiary, and on your death any money not yet paid out can be taken by your beneficiaries as a lump sum, a regular income or simply left for their future benefit.
In each case, if you die before the age of 75, the benefits paid to your beneficiaries tax free. If you are older when you die, the beneficiary pays tax on the benefits at their highest rate of income tax rate.
Passing on your pension down the generations
If you want to ensure your family continues to enjoy the benefits of your pension long after you are gone, you can turn it into a ‘family asset’. This involves passing your pension benefits to a nominated beneficiary on your death. This can be anyone inside or outside your family and they can choose to receive the benefits as a lump sum, a regular income, or as a pension fund for their future use. If you die before you are 75, the benefits are tax-free and if you are older when you die, the beneficiary pays tax on them at their normal rate.
The benefits can continue to be passed down through any number of generations and beneficiaries only pay tax on them if the person who passes them on has died after the age of 75.
2. Insurance protection
Insuring against Inheritance Tax liability
If you have a large estate with a lot of property and other illiquid assets, it may be worth taking out an insurance policy for the expected tax liability and writing it so the sum insured is paid into a Trust when you die. This can provide funds for your beneficiaries to use however they decide – including paying any Inheritance Tax.
If you take out, or already have a life insurance policy, we also recommend that you write it into a Trust. This ensures any payment is made quickly on your death and it will not be regarded as part of your estate, so it will not incur Inheritance Tax.
3. Business assets
If you are a business owner, you may be able to use Business Property Relief to mitigate any Inheritance Tax liability. The level of tax relief you receive will depend on the extent of your shares in the business.
If you do not own a business, you can still take advantage of Business Property Relief through tax-efficient investments that have been held for more than two years.
These are both very complex areas and we strongly recommend that you ask us for advice based on your personal circumstances.
If you are a joint tenant with your spouse or partner, your property will pass to the surviving partner when one of you dies. However, if you are Tenants in Common and own different proportions of the property, you can gift your proportion to, for example, your children. When one of you dies, the other has the right to stay in the property and cannot be moved out.
If you leave your property to a direct descendant in your Will, it is eligible for Residential Nil Rate Band, meaning it may be exempt from Inheritance Tax, depending on its value.
It may also benefit you to leave your property in a Trust. In certain circumstances, this may also make it eligible for Residential Nil Rate Band, although this will depend on the type of Trust, as well as the value of the property and who you leave it to.
If you want to pass your property on through your Will, it is important to talk to your solicitor about the best way to do this.