According to Today’s Wills and Probate, almost half of homeowners describe themselves as “just getting by” financially, despite their estates being above the current Inheritance Tax (IHT) threshold.
Although this might sound contradictory, it’s more than feasible to have a relatively modest disposable income at the same time as owning a high-value home.
However, in some cases, not feeling as though you fit the definition of “wealthy” could mean that you incorrectly think estate planning isn’t relevant to you. This could lead to your beneficiaries receiving an unnecessary IHT bill, or one which could have been mitigated with careful estate planning.
Read on to discover why understanding the value of your estate could ultimately be beneficial to your loved ones.
Increased asset values combined with frozen thresholds could expose your estate to Inheritance Tax
Your wealth status can often change without you consciously realising it. Rising asset values, such as property, don’t influence your everyday income, so aren’t immediately in your line of sight. It is feasible that you bought your home years or even decades ago, and its value may have increased significantly.
Other assets, such as long-term investments, may have also grown substantially without boosting your income.
IHT is usually applied at 40% on assets above certain thresholds. The nil-rate band, above which an estate usually becomes liable for IHT, is £325,000. This has been frozen since 2009/10 and is due to remain at its current level until April 2031.
In some cases, frozen thresholds can lead to fiscal drag; as asset values rise, the IHT threshold remains the same, which could result in more estates becoming liable for IHT. In fact, according to Saga, 10% of estates may be liable for IHT by 2030.
The residence nil-rate band applies up to £175,000 when you leave your home to your direct descendants. Combined with the nil-rate band, this means you could potentially pass on up to £500,000 before IHT is applied.
Unused allowances can be transferred to your spouse or civil partner, potentially allowing a couple to pass on up to £1 million.
Regular valuations and reviews can help you establish the value of your estate
IHT rules mean it’s important to take an overview of your whole estate, rather than just looking at your income and bank balance as a barometer of your wealth.
It’s a good idea to get up-to-date valuations for your:
- Home and any other properties
- Cash savings
- ISAs
- Investments
- Valuable possessions
- Business interests.
Pensions have traditionally been excluded from an estate and therefore have often been a tax-efficient asset to pass on.
However, from 6 April 2027, most unused pension funds and some death benefits will be included in an estate for the first time, potentially raising its value and bringing it into the scope of IHT.
From 2027, when calculating your estate’s value, you’ll need to include all current and previous pensions, which could be from former employers or periods of self-employment. We can help you track down any long-held or potentially lost pensions.
Valuing your estate can be a big job if you try to calculate it as a one-and-done exercise. Rather, try to maintain up-to-date records and review valuations on a regular basis so you can adjust your estate planning if necessary.
As well as the total value of your estate, you’ll need to factor in debts and liabilities, such as any outstanding mortgages, credit card balances, or loans. Funeral expenses can usually be deducted from your estate.
Understanding your potential IHT exposure can support your estate planning strategy. If you think your estate could be liable for IHT, there are actions you can take to reduce its value and mitigate the bill for your beneficiaries.
These can include:
- Gifting during your lifetime
- Charitable giving
- Trusts
To find out more, please see our previous article: 5 ways to reduce your Inheritance Tax bill and boost your family’s future.
You could also consider taking out life insurance and putting it into trust. While this won’t reduce the value of your estate, it could leave funds for your loved ones to settle an IHT bill.
Get in touch
We can help you to establish the value of your estate and work with you on your estate planning strategy in line with this. Please get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100, and we’ll be happy to help.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, or trusts.