Many people want to leave behind a legacy for their children or other close relatives. It can be a good way to pass on the assets you’ve built up over your lifetime to the next generation. However, with complex rules, tax implications and wills to deal with, it can seem like a difficult area to navigate.
This article will help you start thinking about the key elements of planning your legacy.
Setting Your Goal
To set your legacy goal, there are three key things to consider:
- What do you wish to include in your legacy?
- When do you think you’ll pass the inheritance on?
- What rate of inflation will you apply to any money you wish to leave?
First, think about the people who you would like to benefit from your inheritance. These may be children, grandchildren, other relatives or anyone you wish to leave something to. For each of these you may have a specific benefit in mind, such as money for university fees or a house deposit. Add the current cost of these items together to set your goal in today’s money.
Next, consider when you’re likely to be leaving behind your inheritance. Although it’s not a pleasant thought, it makes sense to plan so there’s enough to carry out your wishes later. Recently, the Institute and Faculty of Actuaries, which calculates life expectancy on behalf of the UK pension industry, said it expects men aged 65 to live to 86.9 years, while women aged 65 are expected to live to 89.2 years.
Finally, take inflation into account. Your £1 today won’t have the same buying power as £1 in twenty to thirty years, so it’s important to plan for this. The Government targets a 2% annual inflation rate, so this could be a good place to start.
You now have the target amount for your inheritance pot, the next step is planning how you’ll get there.
Creating Your Plan
You may have already started investing for your inheritance pot through ISAs, Pensions or other types of saving and investment accounts. It’s always wise to keep track of these accounts over time so you know how much is in them and their projected value by your goal date. In addition, consider the value of any assets you own such as your home and any other valuable property.
If your current arrangement falls short, it may help to start an affordable monthly direct debit into one or more of your accounts to close the gap.
Working the details out can be difficult, especially if you have multiple accounts between several providers, so you may want to get financial advice.
A vital, and often overlooked, part of an inheritance plan is creating your will. Without an up-to-date set of instructions, there’s no guarantee your wishes will be carried out.
Death and Taxes
At death, your beneficiaries won’t normally pay tax if the total of your estate is below the Inheritance Tax threshold (£325,000 for the 2019/20 tax year) or if you are leaving everything above this threshold to a spouse, civil partner or charity.
A 40% tax typically applies on anything above this threshold before your estate is released to your intended beneficiaries. Remember, these figures will likely change in the future
You should also consider the Inheritance Tax benefits of gifting to charity. If you leave something to charity in your will, then it won’t count towards the total taxable value of your estate. You can also cut the Inheritance Tax rate on the rest of your estate from 40% to 36%, if you leave at least 10% of your ‘net estate’ to charity.
The RNRB (Residence Nil Rate Band) is an additional allowance for Inheritance Tax. In order to qualify, you must own a property or a share in a property, which you have lived in at some stage and which you leave to your direct descendants (including children, grandchildren or step-children). The RNRB is set at £150,000 for 2019/20 and £175,000 for 2020/21. For estates over £2 million, the RNRB is reduced at a rate of £1 for every £2 over £2 million. These figures are per person, so a couple may benefit from two allowances.
Inheritance Tax is a complicated area, so many people choose to seek professional financial advice regarding their circumstances.
In summary, if you want to leave an inheritance, start with a clear goal and work towards it. Consider all your current assets but plan for inflation and think about tax implications. If in doubt, seek professional advice.