Interactive Investor

Estate planning: do you have your admin under control?

Getting on top of your paperwork might seem a chore but it could save your loved ones a major headache when the time comes to sort out your estate, writes Rachel Lacey.

13th November 2023 12:49

by Rachel Lacey from interactive investor

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When we talk about estate planning we tend to think about ways to cut a potential inheritance tax (IHT) bill and making sure we have written a will.

But while these are both important parts of estate planning, they go hand in hand with quite a bit of admin. At best, poorly organised affairs could leave your loved ones with an almighty headache. At worst, they could end up paying too much tax or missing out on an inheritance altogether.

Get the lowdown on all the paperwork you need to be aware of to ensure your estate doesn’t cause any unnecessary stress when you die.

Update your will and write a letter of wishes

Simply writing a will is not enough. Life has a habit of changing, so to ensure your money ends up where you want when you die, it’s essential to review it regularly. This is particularly important if you have got married or divorced. You may also want to add grandchildren if and when they come along.

Alongside your will, it’s also helpful to write a letter of wishes. This can be used to say who you would like to inherit personal items like watches or jewellery, outline your wishes for your funeral or offer guidance on the future of any trusts you might have left. If your will is in any way controversial, your letter of wishes also gives you the opportunity to explain your decision.

A letter of wishes isn’t legally binding. As such you do not need to have your letter drafted by a solicitor, nor does it need to be witnessed. It just needs to be written in clear English, dated and signed.

Unlike a will, your letter of wishes isn’t a public document, which means it can remain entirely confidential until you die.

Choose your executors and keep them in the loop

It’s also important to choose an executor for your will – this is the person that will have the legal responsibility to handle your estate when you die. This can include applying for probate, paying any taxes, valuing the estate and distributing it according to the instructions in your will.

Any adult can be appointed as an executor, but most people choose close family members whom they trust – it doesn’t matter if they are also a beneficiary of your will. As there’s a fair amount of work involved many people appoint more than one (you can name up to four) or choose people who already have experience in the field. If you prefer, you can appoint a solicitor to be the executor of your will, but this will come with added cost.

To make life as easy as possible for your executors, it’s helpful if they know exactly where to find all your relevant paperwork once you have died. This should include your will and letter of wishes as well as information regarding your banking arrangements, pensions, savings and investment plans.

There’s also nothing to stop you discussing what you want to happen when or after you die.  Your executors may need to exercise a degree of discretion after your death, so they will likely find it easier if they know your feelings on certain matters.

Complete an ‘expression of wishes’ form

If you have any defined contribution (DC) pensions, such as workplace schemes or self-invested personal pensions (SIPPs), you will be able to leave any money that’s left in them to your loved ones when you die. However, as this money will fall outside your estate, it cannot be included in your will. Instead you need to complete a ‘letter of wishes’ or ‘nomination’ form from your pension provider to tell them who you would like to inherit the money. Although providers do have the discretion to decide how the money is paid out, there would need to be mitigating circumstances for them to go against your wishes.

You will have been asked to complete one of these forms when you started the pension, but if you haven’t completed one, it’s important to do so straightaway. You should also make sure you update it if either your circumstances or preferences change.

Record your gifts

Giving money to your loved ones before you die is a great way to see your family enjoy your wealth and reduce a potential IHT bill. But, if you are giving away sizeable sums, it’s important to keep a proper record of these gifts. Otherwise, your executors could have a hellish job trying to work out how much money you gave away and your family could end up paying more tax than necessary.

Thankfully, you don’t have to record every gift. Small gifts worth up to £250 don’t need to be declared by your executors, nor do gifts within the £3,000 exemption and gifts for weddings (so long as they are within the tax-free thresholds).

However, if IHT is payable on your estate, then your executor will need to declare any gifts beyond these allowances (known as potentially exempt transfers), that you made within the last seven years.

If you survive seven years after the gift was made, there will no IHT to pay. For the value of any gifts that exceed your nil rate band (currently £325,000) a taper applies. Those made up to four years before your death will be taxed at the full rate of 40% but, after that, the tax payable reduces gradually until year seven at which point the gift becomes free of IHT.

  • How to record a gift

When you make a gift that is a potentially exempt transfer you need to make a record of the following:

  • The name of the person who received the gift and their relationship to you
  • The value of the gift
  • The date the gift was made
  • Any reliefs that can be claimed
  • The value of the gift minus that relief

You will also need to ensure that your executor has access to this record or knows how to access it after you have died.

Your executors will also need to declare regular gifts from income. This can be an excellent way of reducing a potential IHT bill but, in order for them to be tax exempt, your executors will need to be able to demonstrate that they formed part of your regular expenditure and did not impact your standard of living.

These gifts can come under close scrutiny so the onus is very much on you to prove that you could afford to make them from your normal expenditure.

  • How to record gifts from regular expenditure

In addition to recording the date and value of your gifts, you also need to keep a record of the following:

  • Your income: be sure to include your earnings, pension or annuity payments and any rental or investment income for each tax year. You should also record how much income tax you paid.
  • Your expenditure: make a list of all your regular outgoings including all your household bills, insurance, council tax, travel, holiday and discretionary spending, as well as mortgage and rent if you still pay them.

For the gifts to be free of IHT your executors will need to be able to prove that your net income, less your regular expenditure, is enough to cover the cost of the gifts.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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