1. Lasting Power of Attorney – crucial for financial security
Good financial management includes planning for the future. The best way to secure your financial future is to create a Lasting Power of Attorney (LPA). An LPA allows you to appoint someone to act on your behalf if you become unable to do so, whether because of long periods of travel or an illness. An LPA means someone you trust can manage your financial affairs when you cannot. In addition to an LPA for property and financial affairs you can also create one covering decisions relating to your health and welfare which will ensure your best interests are always protected.
2. Wills – have one and ensure it is updated
It is important to ensure that your Will is updated if there are any changes in your life circumstances, such as buying a new property, getting married, etc. It is also sensible to review your Will every five years. Part of the process in making or updating your Will is to ensure that you are making the most of the inheritance tax allowances. Currently everyone has an allowance of £325,000 and in addition, you can also qualify for a further £175,000. It is also important to note that any gifts made between spouses are tax free.
3. Lifetime gifts – seven year rule
It is possible to gift money before you die. However, if you die within seven years of making the gift, the money will be added back into your estate for inheritance tax purposes. If you survive between 3 – 7 years, the amount of money that is added back will decrease on a sliding scale. If you do decide to gift property it is important that you do not retain a benefit of the property. This is known as a gift with reservation of benefit, and this could also mean that the value is added back into your estate.
4. Importance of using Annual exemptions
• Annual exemption: you can give away £3,000 worth per tax year. If you have not used your £3,000 allowance from a previous tax year you can carry it over to the following year.
• Wedding or civil ceremony gifts: £5,000 for a gift from a parent, £2,500 from a grandparent, £1,000 from anyone else.
• Small gifts exemption: You can give unlimited gifts up to the value of £250 per person, per tax year. However, it is important to note that you cannot use another exemption on
the same person.
5. Gifts of surplus income
A great tool for inheritance tax planning are gifts out of surplus income as these gifts can be immediately excluded from your estate when calculating inheritance tax. They can be for any amount and can be a one-off gift or regular gifts made to one or more individuals. To be excluded from your estate, the gift must be made from surplus income only and making the gift must not have any detrimental impact on your standard of living. To achieve this relief, it is crucial to provide appropriate evidence to HMRC, you must consult a professional on the requirements.
6. Charity giving
If you are considering making a gift to charity in your Will, careful consideration should be given to the amount you are donating. If your Will provides 10% of your estate to charity; your estate will be able to claim inheritance tax at 36% instead of 40%.
In addition, if you have already left a gift to charity in your Will of 4% (or more) you could increase this to 10% and your beneficiaries will receive the same amount. The difference is the tax that would have been payable and will now go to your chosen charity instead.