Estate Planning – How to make a start

Specialist Dental Financial Adviser, for Wesleyan Financial Services, Stephen Barry, shares his insights on estate planning and how planning sooner rather than later can be beneficial.

During the Autumn Statement, there were rumours of changes to inheritance tax (IHT) - a tax which may be paid on your estate when you pass away. Although nothing changed, it appears to have generated interest within my dental client base. The current nil-rate band (the total value of assets that can be passed on without any inheritance tax liability) for an individual is £325,000.  Residential property owners may also benefit from an additional £175,000 allowance referred to as the Residential Nil rate Band (RNRB), although this is subject to certain conditions. Therefore, each individual potentially has allowances totaling £500,000. Anything above this is subject to inheritance tax at a rate of 40%, unless it is left to a surviving spouse, where usually no IHT would be paid.

When it comes to estate planning you can either do nothing and accept the fact that 40% tax will be payable or start planning to limit the tax liability.

I would say to any dentist, if you have sufficient funds to achieve your desired retirement, why are you still adding to those funds? Now is the time to start taking action to try to reduce any inheritance tax liability. The sooner you start taking action, the better the outcome in financial terms. Careful planning can also lessen the burden on your beneficiaries during what would already be an emotional and stressful time.

Before embarking on estate planning, I would encourage my clients to think about the following: What is your desired retirement income? What is your expected expenditure in retirement? Do you have any plans which will require significant cash such as a hobby or holiday of a lifetime.

Potential options

Gifting

You may choose to gift money directly to your beneficiaries. A number of exemptions are available for making gifts. These include, but are not limited to, an annual gifting allowance of £3,000. If no money was gifted in the previous year, then the unused £3,000 can be carried forward, meaning up to £6,000 can be gifted in one year with no inheritance tax liability. Nonexempt gifts may incur an IHT liability on death, if the donor dies within seven years and the value of all non-exempt gifts in the last seven years is greater than £325,000.  Gifts made less than three years before death incur a 40% tax charge and those made three to seven years before death, are taxed on a sliding scale.

Trusts

Rather than gifting money directly to beneficiaries, some people may prefer to gift the funds into a trust. The seven-year principle still applies – and tax could be payable if the donor dies within seven years. However, unlike a direct gift, trusts allow the donor to maintain some control over who benefits from the gift and when the gift is payable. There are many different types of trusts available, and the choice depends on factors such as the desired beneficiaries and the time of access. Some trusts also allow the donor to retain access to any part of the lump sum gifted or any income generated from the interest of the lump sum.

Reviewing your existing arrangements

A number of cost-free changes can be made to existing financial arrangements to reduce the potential liability such as placing life policies into trust and redirecting employee and pension death benefits away from your estate.

Insuring the Liability

Even with careful planning it will not always be possible to completely mitigate any potential inheritance tax liability, and you may wish to consider life insurance which if written in trust will provide funds to pay any IHT liability on death.

The Importance of Planning

Whilst there are many ways to reduce inheritance tax liabilities, the likelihood is that a combination of these steps may be appropriate.

I work with many dentists nearing retirement age – some have NHS pensions, private pensions, and significant sums of money in cash and other investments, many have an estate value that would incur an inheritance tax liability. Most of these clients have not considered estate planning, fearing that they may not have enough money available to achieve their desired retirement.

Through cashflow modelling, I have been able to reassure clients that they have sufficient assets to enjoy their desired retirement lifestyle, whilst also demonstrating the potential inheritance tax liability, should no action be taken.

Specialist advice

It’s understandable that many dentists don’t want to put their enjoyment in retirement at risk by gifting assets away even if they know they have an inheritance tax liability.

It can be difficult to understand how much you will have and how much you will need in retirement - this is where talking to a Specialist Dental Financial Adviser can help. Assessing your finances and understanding your retirement objectives, provides valuable insight into your retirement and once you feel confident knowing that you will have sufficient funds available, you will be in a better position to consider estate planning.

Please bear in mind that advice in relation to inheritance tax planning is not regulated by the Financial Conduct Authority.

Tax treatment depends on individual circumstances and may be subject to change in future.

If you require support on financial planning, speak to a Specialist Financial Adviser at Wesleyan Financial Services as part of a no-obligation financial review by visiting wesleyan.co.uk/lifes-journey or calling 0800 316 3784.

About Stephen: Stephen Barry has been a Specialist Dental Financial Adviser at Wesleyan Financial Services for over 15 years, helping to support dentists with their financial planning and secure their futures.

Wesleyan Financial Services Ltd (Registered in England and Wales No. 1651212) is authorised and regulated by the Financial Conduct Authority. Registered Office: Colmore Circus, Birmingham B4 6AR. Telephone: 0345 351 2352. Calls may be recorded to help us provide, monitor and improve our services to you.