Five new year resolutions to protect your family wealth
1. Review your Will
You should review your Will every five years or when there is a significant change in your circumstances. The following points arising from the October budget are of particular relevance as 2024 draws to a close.
- The freeze of the inheritance tax (IHT) nil rate band at £325,000 and residence nil rate band at £175,000 has been extended to 2030. This freeze has brought many more individuals within the scope of IHT as asset values have continued to rise.
- From April 2027, most pension pots will be included in an estate for calculating IHT on death. This is a significant change and may push an otherwise non-taxable estate into paying IHT. It may also impact an estate’s eligibility for the £175,000 residence nil-rate band if the inclusion of the pension means the estate is now over £2 million.
- If you own assets which qualify for IHT agricultural or business property relief, from April 2026 the relief has been restricted to £1 million of qualifying assets at 100% relief (0% tax) and the remainder at 50% IHT relief (20% tax). See our article Five Key Takeaways for Farming Businesses Following the Budget for more information. AIM portfolios which previously qualified for 100% relief are reduced to 50% relief (20% tax) with no £1m allowance.
- If you are a ‘non dom’, IHT is moving from a domicile to a residence basis from 6 April 2025. There are implications for income tax and IHT including that on death ‘long term UK residents’ (resident for 10 out of the last 20 tax years) will be assessed for IHT on their worldwide estate for up to 10 years after leaving the UK.
This means that a review of your Will to maximise its tax efficiency and ensure that all available allowances are used in the most effective way would be well advised in 2025.
2. Draw up a Lasting Power of Attorney (LPA)
An LPA for financial decisions will enable a trusted person of your choosing to manage your financial affairs on your behalf should you become mentally incapable in the future. Having your choice of person appointed to act avoids an expensive and time consuming application to the ‘court of protection’. A professionally drafted LPA can also ensure that your affairs are managed in the optimum way. For example, it could provide that your chosen attorneys must produce accounts each year to a third party such as your solicitor or accountant, to ensure professional scrutiny over how your finances are being managed.
3. Review the division of assets between yourself and your spouse or civil partner
Your tax liability to income tax, capital gains tax (CGT) and IHT could be adversely affected if there is an imbalance of assets between yourself and your partner. For example, it can be advantageous in some circumstances to consider a trust in your Will to use the IHT nil rate band and residence nil rate band, but this will not be possible unless there are sufficient assets in each partner’s sole name (and not in joint names) to take full advantage of this. Assets can be transferred between couples who are married or in a civil partnership without IHT or CGT consequences (this does not apply to cohabiting couples).
Similarly, for CGT, with the annual allowance having been reduced to £3,000 and the rates increased to 18% for a basic rate taxpayer and 24% for a higher rate tax payer, it is important to utilise the allowances of both of a couple.
4. Consider using your annual exemption to reduce your inheritance tax (IHT) liability
Every person is entitled to an IHT annual exemption of £3,000 per annum. This can be carried forward for one tax year, so if you did not use your annual exemption in 2023/24 you have until 5 April 2025 to use both years’ exemptions totalling £6,000 each (so £12,000 between a couple). Gifts within the annual exemption are IHT free even if you do not survive 7 years after making the gift.
In addition, if you are likely to have a larger IHT liability you might like to consider whether you should undertake further action. There are a number of valuable IHT reliefs for example ‘normal expenditure out of income’ but these can be lost if care is not taken to ensure the requirements are met and records are kept. Trusts can be used to retain an element of control over the assets if necessary.
For more information on gifting, please see our article ’tis the season.
5. Consider whether your estate could benefit from asset protection
You should give some thought as to what actions can be taken to ensure your estate is protected. Trusts can be used either during your lifetime or in your Will to ensure that your assets are distributed as you intend, and to provide the maximum possible protection against third party claims.
This is particularly relevant if you:
- have a second marriage and wish to benefit your current spouse, whilst ensuring that your assets ultimately pass to your children from your first marriage;
- are concerned about care fees eating into your assets;
- have young children; or
- have an adult child whose nature or circumstances make it inadvisable for them to receive a large sum of money or who themselves have estates likely to be subject to IHT.
Speak to a specialist
If you would like help in implementing your resolutions, or in determining a personal plan to manage your family wealth, then please do not hesitate to contact us on 0345 209 1000
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