What is the most tax efficient mechanism to set up a will and are there any strategies people can adopt for good tax planning in their will
Broadly, you have to recall where you're domiciled. What that means practically is where your primary residence is. Domicile and residence are two separate issues, but generally, if you are living in England and Wales and your life is here, it could very well be that you satisfy both the residence and domicile tests, meaning that your estate or whatever you leave behind could be a domicile.
Subject to what is called inheritance tax. Generally, for UK domiciled individuals, inheritance tax is charged at about 40 percent on their worldwide assets, above the nil rate band. So, the nil rate band, that has a particular value. So anything above that, 40%.
But if you're not domiciled in the UK, then you only pay inheritance tax on whatever is in the UK or UK or United Kingdom assets. But as well, you could also use what is called excluded property rules, but that's generally for if you're a non domiciled person to avoid inheritance tax. You would have to take very good care with your will drafting to ensure that the resident's NIL band or the RNRB could provide an additional inheritance tax threshold in order for you to pass on residential property and residential property only to your direct descendants, meaning your son or daughter.
Absolute Gift: Another potential strategy that you could employ is perhaps using the concept of an absolute gift. So if you give an absolute gift to your spouse or civil partner, that's generally exempt from inheritance tax. But there are other alternatives. So for example, you can use a life interest trust to protect assets for your children, but that would also give you the ability to qualify still for the spousal exemption.
Discretionary Trust: But then you could also then use a discretionary trust. A discretionary trust could provide some flexibility, meaning that the trustees can apply your wealth to your beneficiaries as and when needed, but. That simply means that there could be an ongoing inheritance tax charge. There's a little squirk on the English law.
So for example, if you make a gift that's potentially exempt that could only be exempt if the donor survives for seven years. So if you make your will today 2024, and you give a gift today, And you live for another seven years. Well, that could become exempt. But if you pass away before the seven years and the will provides for the PT or the potentially exempt transfer tax to be paid from the estate, then that could create a tax free legacy.
There are other things, for example, business property relief, agricultural property relief, charitable relief. So for example, if you leave 10 percent of your entire estate to charity, that would reduce your inheritance tax rate from 40 percent to 36%. But again, this calculation can be very complex. So you may have to engage the services of an accountant and or a specialist solicitor or barrister.
Other potential routes: There are a few more strategies, for example, lifetime gifts, trusts, will trust, deeds of variation and gifts and downsizing. And make a note about downsizing and why people would downsize. Now generally, the cost of elderly care is very expensive. So you could very well think that you can, maybe if you have a big six bedroom house, you could sell that.
Move to a two bedroom flat on the ground floor and have some liquidity to use for your carers or other forms of medical assistance coming towards the end of your life. So the, you know, but again, the best strategies all depend on your particular subjective, personal, financial, and family situation.
But if you have a plan now to mitigate your risk. Lifetime planning, trust, tax relief, and charitable gifts. You could very well minimize your inheritance and other tax exposure.
-Learnings from Episode 2 of Vera Legal Insights with Mikhail Charles.
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