Estate planning is a fundamental part of financial planning. Not only can it help to ensure that your loved ones will be taken care of when you’re no longer around, but it can also help to minimise Inheritance Tax (IHT).
While estate planning is an important process for everyone, it is particularly important for those on high incomes. This is due to the fact that those in the top tax brackets typically have a lot of assets to protect. With that in mind, here is some estate planning advice for high earners.
What is estate planning?
Estate planning is all about organising your estate so that it provides for you and your family both during your lifetime, but also after you have gone. Quite possibly the most major factor for high earners is understanding their Inheritance Tax (IHT) position as without effective planning here, the largest beneficiary of your estate is likely to be HMRC. What many don’t realise is that IHT is a voluntary tax. In other words, you can reduce your liability, and you can plan in a way that ensures you retain control over your assets during your lifetime, but they sit outside of your estate from an IHT perspective.
Putting an estate plan in place has a number of benefits including:
- Peace of mind: By clearly detailing your wishes in an estate plan, you can rest assured that your assets will go to the people who matter the most to you.
- Orderly transfer of assets: An estate plan can help to ensure that your assets are transferred to others in an orderly manner, but also make sure that probate is taken care of shortly after you pass away. Probate will not be granted until all IHT is settled which can be incredibly stressful for your family.
- Mitigating Inheritance Tax (IHT) liabilities: Without a proper estate plan, HMRC could be the biggest beneficiary of your estate.
- Preservation of generational wealth: Putting a plan in place can help to ensure that wealth you have built up for future generations is preserved.
Key estate planning considerations
When putting an estate plan in place, one of the first things to consider is who you want your money to go to. Once you have determined this, you should consider putting the details into a will. This is a legal document that details how you would like your assets to be distributed in the event of your death. If you die without a will in place, there are rules that will dictate how your estate is distributed, meaning that your wealth may not be passed on the way you envisioned.
Making a Lasting Power of Attorney (LPA) is also a good idea. An LPA is a legal document that appoints one or more people to make decisions on your behalf. If you lose the mental capacity to manage your money in the future, an LPA with a trusted individual will provide you with a degree of assurance. When making a will and/or LPA, it can pay to speak to a financial adviser and you should also take legal advice.
Another consideration is the amount of money you will require in the years ahead. Here, you need to consider expenses such as school fees, retirement income, and care costs later in life. You’ll want to ensure that you can generate the required income from your assets. However, at the same time, you’ll want to ensure that much of your wealth is parked outside your estate from an IHT perspective. This is where trusts can be effective. With a Discounted Gift Trust (DGT), for example, one can effectively remove assets from their estate from an IHT perspective, while retaining the right to fixed regular payments. Any future growth within such a trust is also outside of the estate from an IHT perspective.
How estate planning can help you navigate Inheritance Tax
If not properly planned for, Inheritance Tax could cost your loved ones a lot of money. In the UK, the government collected £7.1 billion[1] in IHT for the 2022/2023 tax year, up 36% on the figure five years earlier. While this surge in IHT receipts was partly due to higher asset prices, it was also the result of a lack of financial planning.
By planning ahead, and considering various IHT minimisation strategies, high earners can ensure that more of the hard earner wealth is retained by their family rather than being lost in inheritance tax. It’s worth noting that the IHT rate in the UK is a flat 40% charge on your taxable estate. This means that, without a plan, a high earner with an estate worth £10 million could be looking at an IHT liability of circa £4 million.
[1] https://www.ftadviser.com/your-industry/2023/04/25/iht-receipts-grow-by-1bn-year-on-year/
Gifts and charitable donations
Another effective estate planning strategy is gifting. By gifting assets to younger generations while you’re still around, you could enjoy seeing your wealth put to good use, while simultaneously reducing your Inheritance Tax bill.
In the UK, individuals can currently give away assets or cash worth £3,000 per year as gifts, without this being added to the value of their estate. However, under Potentially Exempt Transfer (PET) rules, gifts of unlimited value are exempt from IHT as long as the individual survives for a period of seven years after making the gift. So, gifting can potentially reduce the size of your estate significantly.
Similarly, charitable donations can help bring down the size of your estate. Donations are taken off the value of your estate before IHT is calculated. And if 10% or more of your estate is left to charity, the donations can reduce your IHT rate.
Of course, you don’t want to gift or donate too much money as you need to make sure that you are taken care of. This is where a proper financial plan comes into play as cash flow modelling can show you what you can afford to gift whilst still maintaining the lifestyle you want to live in the future.
Why it’s important to seek estate planning advice
Estate planning is a complex area of wealth management, especially for high earners. There are such significant opportunities to save on tax, that the help of a professional who has the potential to save you hundreds, if not millions of pounds, is a great investment in itself.
At Bowmore, we have decades of experience when it comes to estate planning for high earners. We understand the challenges you face in this area of financial planning, and we can assist you in tackling them.
Want to find out more about how we can help you with estate planning? Get in touch with us today.
BOWMORE FINANCIAL PLANNING
PHONE 01275 462 469
Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority
The Financial Conduct Authority does not regulate Estate Planning, Inheritance Tax Planning or cash flow Planning.
Bowmore Financial Planning Ltd is not regulated to provide tax advice
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