Making sure that your assets – property, belongings and capital – are protected by your will and estate planning can become a complicated process when tackling the many and varied tax laws regarding the issue of inheritance, especially where your estate features a diverse portfolio of assets such as property, shares and savings.
Whilst the first and most obvious step in this process is to write up a will, there is much more to the process of estate planning than just this alone.
Putting measures in place to control what happens to your estate once you are gone and to ensure that any assets are handled in the most tax efficient manner possible for your beneficiaries is a key part of the process.
Moreover, changes in your personal circumstances, such as the birth of a child or starting a business, can mean that the objectives of your estate planning may develop over time, requiring that your will is adapted and checked for relevance to your needs.
So what are the main reasons for ongoing reviews of your will and estate planning?
Your personal circumstances change
Your will states how you wish your estate to be handled and distributed at the time of your death, but of course it can only be based on your current wishes and plans. What happens if your personal circumstances change?
There are many ways your life situation could change, for instance:
- You become a parent or a grandparent.
- You buy property, to live in or to rent out.
- You marry, or divorce.
- A relative leaves an inheritance to you.
- You retire.
- You become bankrupt.
- You move abroad.
Any of these above could have an impact on your will and how your estate will be handled after your death, including the issue of taxation.
Keeping track of such changes by regularly reviewing your will and estate planning objectives will ensure that any life changes have been accounted for.
The tax rules changes
The UK tax system rules are constantly being altered, which in turn has implications for your will and estate planning, whether that be:
- an updated tax rate
- a change in the rules for tax relief eligibility
- an alteration to your tax code
- a new opportunity to claim tax exemption
- changes to other areas of legislation that affect the handling of your estate
For instance, the residence nil rate band, introduced in 2017, made it possible for property passed to direct descendants of the deceased to carry an extra exemption from inheritance tax, as long as the property was the deceased’s main residence or they occupied the property at some point during the period of ownership.
The residence nil rate band was originally set at £100,000 in 2017 but since then has increased by £25,000 each year. This increasing residence nil rate band is one of the factors that could be considered as part of your estate planning.
This is just one instance of changes to tax legislation that could affect your will and estate planning. Carrying out a regular review of your estate in the light of changes in tax legislation will guide any corresponding changes in your will.
You have non-dom status or live overseas
Most expats and non dom individuals become accustomed to dealing with their complicated tax situation, handling both the tax systems and legislation of the UK and their home country, and applying this to their estate.
The detail of your domicile, whether that be a domicile of origin (linked to the details of your birth), dependency (the domicile of your parent, for instance) or choice (when you leave the UK and choose to take up the domicile of your new home country), is a critical deciding factor in how your estate will be treated after your death. Should your residence status change over the course of your life, there will be definite implications for your will.
When it comes to planning ahead for inheritance tax, an expat’s liability will be based on certain factors including:
- the length of time they have lived overseas
- the location of their estate assets – in the UK or overseas
- whether these assets are categorised as excluded property
Inheritance tax is not incurred on excluded property which includes certain property located overseas and FOTRA government securities (free of tax to residents abroad).
Where the estate of a deceased foreign domiciliary is exempt for the purposes of inheritance tax, there will be no need to report the inheritance to HMRC. This is reliant, however, on:
- the deceased having died overseas
- that at no time did they hold UK domicile status
- UK assets being inherited in accordance with a will or passed to a surviving spouse or civil partner are in the form of shares or capital with a value below £150,000 at the time of death
As at February 2019, the estate of a non dom individual who lives overseas and died there will only incur UK inheritance tax on UK assets, including money held in a UK bank account.
Therefore, money held in overseas bank accounts and overseas pensions will not incur inheritance tax.
However, where a non dom individual was resident in the UK for 15 of the previous 20 years or their main place of residence was in the UK for any part of the three years leading up to their death, they will be deemed UK domicile, and inheritance tax would become liable on overseas assets as well as UK assets.
Domicile therefore becomes a serious consideration when reviewing your will and estate planning.
You are a business owner
The factor of business ownership complicates the process of estate planning, for instance, working out the best way to leave your business to a family member, but also offers a number of tax advantages and reliefs.
Business Relief may reduce the value of chargeable assets at the time of death and lifetime gifts at the time of transfer in relation to inheritance tax, offering 50% or 100% relief under certain conditions. Qualifying assets include property and buildings, machinery and unlisted shares.
Business relief can only be claimed on a business or asset owned by the deceased for a minimum of two years before their death.
It may be worth examining the potential for inheritance tax liability and business relief when looking to sell shares in your business. Under business relief, shares may offer relief of up to 100%, whereas capital in your bank account from the sale of shares will not. Such consideration may well lead to a decision not to sell the shares or new investigations into how to reinvest that capital.
Setting up a business trust can be an effective way to ensure your that business is passed on to the next generation in the most tax effective way.
Planning ahead for advantage
Taking a proactive approach to your will and estate planning, with an eye on any change to your personal circumstances or tax legislation, raises the likelihood that your wishes will be adhered to and your beneficiaries provided for in the event of your death.
For instance, making a gift need not have an inheritance tax repercussion if it happens over seven years before your death.
Furthermore, regularly reviewing your will and estate planning objectives reduces the possibility of disputes and challenges at the point of probate, and the related stress and upset, and ensures that you maintain control over how your estate is distributed after your death.
Legal disclaimer
The matters contained in this article are intended to be for general information purposes only. This article does not constitute tax, financial or legal advice, nor is it a complete or authoritative statement of the rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert tax, financial, legal or other advice should be sought.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
