Estate Planning

This is the process for preparing for the transfer of a person’s assets following their death. The key requirements being a swift, simple, tax efficient way of executing the deceased’s wishes usually expressed within their will.

Importance of an up to date Will

Sadly it is true that many people in the UK either do not have a will or have one that is so out of date that it does not reflect the specific wishes of the individual concerned.

Key reasons for having an up to date Will:

Writing a Will to Meet Legal Requirements

For a will to be legally valid, you must:

Consequences of Dying Without a Will

If you die without leaving a will then the law will decide how your Estate is distributed.

This would mean:

Lasting Power of Attorneys

A power of attorney is a legal document that allows someone to make decisions for you, or act on your behalf, if you are no longer able to or if you no longer want to make your own decisions.

The reasons for doing so may include:

Power of Attorney Options

It’s important to be aware that there are different types of power of attorney and you may want to set up more than one. We’ll explain:

Importance of Lasting Powers of Attorney

You can ensure that people you trust, who you know will look after your best interests, are appointed to look after your finances, health and care at a time when you may no longer wish to have that responsibility or are unable to do so for some reason.

Inheritance Tax

Inheritance Tax (IHT) is a tax levied on the Estate of someone who has died which would be their property, money and possessions. The Estate will normally become liable to pay IHT if it is in excess of £325,000 when the individual dies.

Who is liable to Pay Inheritance Tax

In the event of a will it is normally the appointed Executor who arranges to pay the Inheritance Tax. If there is no will then the appointed Administrator of the Estate will organise the tax payment which is normally due within six months of death.

Inheritance Tax and any debts are usually paid first from the Estate funds or sale of the assets. Once these have been paid either the Executor or Administrator can distribute the remainder of the Estate to the legally entitled beneficiaries.

Inheritance Tax Exemptions

Inheritance Tax does not normally apply where:

Inheritance Tax Costs

The current threshold for payment of Inheritance tax is £325,000 and will not be reviewed until 2021. This is called the nil rate band (NRB).

Any excess over the £325,000 nil rate band will be liable for Inheritance Tax at a rate of 40% which would be reduced to 36% if 10% of the net Estate is left to charity.

Estate value – £750,000
Nil rate band – £325,000
Excess – £425,000
Tax payable at 40% – £170,000

Recent change

The Residence Nil Rate Band (RNRB) – also known as the home allowance has been recently introduced.

This is an additional nil rate band allowance when a residence is passed on death to a direct descendant. This amendment is being phased in over the next four years.

The residence nil rate band allowance will increase in line with the Consumer Prices index from 2021.

To be eligible, the residence or a share of it must pass to the children or grandchildren, including step-children, adopted children, foster children but not nieces, nephews or siblings.

Reducing the amount of Inheritance Tax Payable

This is a complex area of tax planning but the following sets out a few simple tips:

What is a Trust

In essence, a trust is a legally enforceable contract set up by the settlor, the person who own the assets held within the trust, which gives the appointed trustees legal responsibilities to implement the wishes of the settlor including who should benefit from the trust. Trustees also have responsibility to manage the trust, decide how assets should be invested and pay any tax owing.

There are many reasons for setting up a trust with one of the most popular being the protection of family assets from the Inland Revenue or even other members of the family.

It is important for settlors to understand that once assets are placed in a trust in most instances they are no longer theirs, but fall under the care of the appointed trustees. As a result, the settlor has no responsibility to pay tax on these assets.

There are many different types of trust, some of which are taxed differently, so it is important to seek advice from a financial planner before making any decisions on what is best for you.

The Financial Conduct Authority does not regulate inheritance tax planning or taxation advice.

This information does not represent financial advice and is not suitable for everyone – therefore if you have any questions as to its suitability for you, you should seek financial advice.

Tax treatment is based on individual circumstances and may be subject to change in the future.

Most Popular Trusts

All assets placed within a bare trust are held in the name of a trustee. However, the nominated beneficiary has the legal right to all of the capital and income from the trust at any time if they are:

  • 18 or over in England and Wales, or
  • 16 or over in Scotland

In this situation the assets placed by the settlor within the trust will go directly to the designated beneficiary. Bare trusts are most frequently used to pass assets to younger family members with the trustees managing the assets until the beneficiary is old enough to be deemed financially responsible.

This type of trust allows the trustees certain flexibility to make decisions about how to use the trust income and capital. The extent of the discretion afforded to trustees will depend upon the conditions included within the trust deed and could include:

  • which of the beneficiaries could receive payments from the trust
  • will they be paid from income or capital
  • the frequency of payments
  • any conditions attaching to these payments

Discretionary trusts are used by settlors where it is felt that for whatever reason the beneficiary is not capable of managing their finances sufficiently well, for example due to age or some health condition.

This type of trust instructs the trustees to pass on all trust income to the beneficiary as it arises after the deduction of reasonable expenses incurred.

A common use of an interest in possession trust is where a wife may create a trust for any shares she may own. The trust deed might instruct that on her death all income deriving from those shares will go to the surviving husband. The husband is only entitled to the income throughout the remainder of his life and has an interest in possession in the trust, but on his death the shares themselves will pass on usually to her children or another nominated beneficiary.

The trustees do not distribute any income from the trust, but accumulate income and profits from the sale of trust assets until the trust expires which is at a time specified within the original trust deed.

This type of trust is used by parents or grandparents who will leave assets in a trust to be released for the benefit of their children or grandchildren at a specified age eg 21, 25.

An accumulation trust has become less popular post 2006 when much of the favourable tax treatment was rescinded and settlors opted to use discretionary trusts as an alternative.

Mixed trusts are a combination of more than one type of trust and are frequently considered when there are beneficiaries of different ages. Within the trust deed this mixture of trusts will allow, for example, child beneficiaries to be treated differently.

Non-resident trusts are where none of the trustees are resident in the UK for tax purposes, or only some of the trustees are resident in the UK and the settlor was not resident nor domiciled in the UK when the trust was first set up.

One of the key benefits of a non-resident trust is that it is not usually subject to capital gains tax in respect of either offshore or UK assets.

The tax rules for non-resident trusts are very complicated as in general each trust is treated differently and therefore professional advice should always be sought.

These trusts apply where a settlor. or their spouse or civil partner wish to benefit from the some way, whether this trust be an interest in possession, accumulation or discretionary trust. In this situation, the settlor will be subject to tax on the proceeds from the trust.

Important: The taxation and treatment of trusts is a complex subject. It is very important to seek professional advice as to what option is best for all parties as the consequences of any errors can be devastating.

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