Estate planning is the process of arranging suitable management and/or disposal of assets in preparation for death. Efficient tax planning during both life and in death (via a will) can reduce possible liability to income tax, capital gains tax and inheritance tax where appropriate.
There are various ways that estate planning can take place. It is important that suitable legal and tax advice is obtained prior to either any disposal or management of assets. This is to ensure that the estate planning is efficient and suitable to your needs. It is also important to maintain the standard of living that you are used to, rather than to dispose of assets in order to possibly avoid paying tax upon death. The best route to take will, therefore, depend on personal circumstances and assets within the estate.
An attractive form of estate planning is via charitable giving. This is because legislation has been designed to encourage giving to charities, which in turn qualifies for tax relief. To qualify, the charitable giving must be to a registered charity which is established for charitable purposes only and is managed by proper persons. The Charity Commission has an online charity register which can be used to research and confirm the status of charities. Another benefit of charitable giving is that you also benefit your chosen charity with much needed funds.
Charitable giving can be achieved via both lifetime giving and upon death. The gifts must be made outright to the registered charity. By making lifetime charitable gifts, this will reduce your estate assessable to inheritance tax upon death and makes use of the charitable exemption i.e. passing tax free to the charity. It is also likely that income tax relief and/or corporation tax relief and/or capital gain tax relief may be obtained depending on the type of disposal and gift made to the registered charity.
Understanding inheritance tax
Upon death, each individual has the availability of a Nil Rate Band which is taxed at 0%. This is currently frozen at a level of £325k. For some estates, there is also the availability of a Residence Nil Rate band which is also taxed at 0%. This is also currently frozen at £175k. Should the estate exceed the aforementioned bands, it may be a taxable estate for inheritance tax purposes. If the estate is liable to inheritance tax, the inheritance tax rate is charged at 40%. However, by including charitable giving within a will, it may be possible to claim the reduced inheritance tax rate of 36%. This can be achieved if 10% of the estate is left to charity (subject to HMRC approval).
By including charitable giving in a will, this also has the benefit of the charitable exemption for inheritance tax i.e. passing tax free and reducing your estate before inheritance tax is calculated. This can, therefore, reduce the amount of inheritance tax that is payable upon death. By achieving the reduced inheritance tax rate of 36%, the beneficiaries in the will i.e. the charity(ies) and other beneficiaries will receive more. Charitable giving can be included in a will via either fixed legacies i.e. cash sums or shares of your estate being left the charity.
It is important to note that, whilst testamentary freedom exists in England and Wales, i.e. you can leave your estate to whomever you wish, it is equally important to consider any challenges against your estate from people who feel that they should have been reasonably provided for. If you do not consider this, you may open your estate up to challenge and result in costs being incurred by your estate in defending the claim, which may undo any inheritance tax saving achieved by the charitable giving.
It is therefore important that appropriate advice is taken with regard to estate planning decisions such as this, to understand the risks and benefits.
Supporting your choice for charitable giving
At Kew Law we can assist in preparing your will, making provision for charitable giving, and advising on the impact this will have on inheritance tax.
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