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Will and estate planning – a difficult subject made more complex by the myriad of tax laws affecting inheritance.
But for many, there will be little more important than protecting your legacy. Particularly where your estate comprises a portfolio of different assets – be that residential and commercial property, savings, pensions, shares and any other assets.
While most people would agree with this in principle, and at the very least consider it prudent to have a will, there is considerably more that can be done to retain control of what happens to your assets after you are gone, and to do so in a tax-efficient manner to the advantage of your beneficiaries.
Importantly, due to changing personal circumstances, and changes in one’s personal balance sheet and evolving objectives, will and estate planning will also require a degree of ongoing attention, to ensure that it remains effective, relevant and up to date.
Here are five reasons why effective will and estate planning requires regular review.
Your will and estate planning should reflect your current wishes – and such is life that these wishes can and, in all likelihood, will change.
You may be approaching a different stage in life or responding to a life event; parenthood, property ownership, retirement, relationship breakdown, bankruptcy – all of which can change how you wish to deal with your affairs on death.
It is therefore important to continually keep your will and estate planning under review.
Whatever your journey or stage in life, you will want to ensure your will and estate planning is reflective of your current circumstances and wishes, whether that is protecting your assets for children from a previous relationship, or avoiding paying IHT twice when passed on from your beneficiaries.
UK tax rules are a moving beast. As such, any will and estate planning you have undertaken can is most likely to be affected by changes in tax legislation; whether merely a change to tax rates, reliefs or other more substantial revisions to the tax code.
Indeed, tax planning options may be completely removed by legislative changes. On the other hand – as one door closes, other doors may open.
One of the most recent changes was the introduction of Residence Nil-Rate Band (“RNRB”). With RNRB, once fully implemented, up to £1million of a married or civil partnership couple’s estate can fall outside inheritance tax (“IHT”).
There are of course conditions attached. RNRB only applies to the deceased’s primary residence, or to property that has at some point been the deceased’s main residence. To qualify, the relevant property must have been deemed your primary residence to take advantage of this relief.
Keeping apace with tax rules is challenging, which is why it makes sense to schedule regular reviews of your will and estate planning to ensure your plans still align to and make the most of tax planning.
3. You live abroad or a ‘non dom’
As a non dom or expat you may well be used to managing relatively complex tax affairs, which will include perhaps dealing with both UK tax and estate administration rules and also similar rules in other relevant jurisdictions.
Your domicile will be a critical factor in your will and estate planning considerations. Similarly, if your residence status changes, this is also likely to have an impact on your will and estate planning.
For expats, the rules for paying IHT usually depend on how long they lived abroad, whether their assets (property, money and possessions) are in the UK or abroad, and if their assets in the UK are what is referred to as ‘excluded property’.
The entire estate of a foreign domiciliary might be excepted, which would result in there being no IHT reporting requirements to HMRC. This is provided that they died abroad, they have never held a UK domicile, and the UK assets in their estate, passing by will or survivorship, are shares or cash with a value on death of less than £150,000.
Rules affecting non doms were due to be amended under the Finance Bill 2017, but were deferred in order to pass the lion’s share of the Bill before the 2017 ‘snap’ General Election.
The basic position is that a non-UK domiciled individual is only subject to UK IHT on UK assets. Any assets that are ‘non-UK situs’ are not within the scope of UK IHT. However, this basic position is tempered where the individual has been resident in the UK on a long term basis. Previously, this meant that where a person was resident in the UK for 17 out of the previous 20 years then he or she were deemed domiciled from the beginning of the 17th tax year of residence.
Once deemed domiciled, then the non dom becomes subject to UK IHT on worldwide assets. Clearly, this has a significant impact on one’s will and estate planning considertions.
These first changes under the new rules propose reducing the timeframe for ‘deemed domicile’ for IHT purposes with the result being that if an individual has been resident here for 15 out of 20 years previous tax years then they are deemed domiciled from the start of the next tax year. This accelerates the time in which a person becomes deemed domiciled for IHT purposes and aligns that period with the new rules for income and capital gains tax.
The second relevant proposed change is around excluded property. Historically, excluded property trusts have allowed a non dom, prior to becoming deemed domiciled for IHT Purposes, to squirrel assets in a structure with the result that the property inside the structure will remain outside of the IHT net in perpetuity. Even if the non dom subsequently became deemed domiciled. This applied regardless of the type of property and whether it was located in the UK or overseas – including UK residential property. Clearly, this was a useful tool in will and estate planning exercises for non doms.
However, changes in the Finance Bill 2017, assumed to take effect from 6 April 2017, will see that UK residential property and assets derived from such property can never be excluded property. For the avoidance of any doubt, this applies to existing structures.
That said, for any other type of asset including UK commercial property, an excluded property trust will be an effective and attractive will and estate planning device going forward.
4. You own a trading business
If you are a business owner, again, your tax position is likely to be more intricate. However, there are some attractive will and estate planning reliefs in this area.
A key dynamic for example will be the interplay between your exit strategy, succession and wills and estate planning.
For example, the owner of shares in an unquoted trading company is likely to be eligible for the rather attractive IHT relief known as Business Property Relief (“BPR”). Generally speaking, in this context, it affords a 100% relief from IHT on death and also, as importantly, on lifetime transfers including transfers on to trust.
However, where one disposes of the shares for cash then, assuming no reinvestment into other qualifying assets, one has swapped assets which are entirely IHT efficient for cash, which is at the opposite end of the spectrum!
One should therefore consider such implications when considering one’s long term will and estate planning. This might result in one exploring alternative, legitimate tax planning that can be effective in reducing any resulting tax bill.
As alluded to above, business trusts can be extremely effective as part of your overall estate planning framework, depending on your circumstances, offering controlled succession planning and protection of your business for your family.
5. Protection is better than cure
Being prepared will always trump a reactive response. Early planning opens up more tax planning options to you. Gifting for example can be tax-free, provided the gift was not made in the seven years prior to the death.
An out-of-date will or estate plan can create the potential for disputes and contentious probate issues during what is already a stressful period for your loved ones.
Keeping your will and estate planning up to date will reduce the likelihood of any challenge or disagreement after your death – ensuring your wishes are carried out as you wanted.
As with all tax and wealth planning, one can only advise on a case by case basis. Once personal and commercial objectives have been determined, only then should any structuring be contemplated.
We can assist with all aspects of will and estate planning. Our services, among others, include: