2 core estate planning challenges your family may face, and how to overcome them

By Chancellor

As you look around at those you love most, it might bring you joy to think about using your wealth to provide them with opportunities over the course of their lives.

Whether you wish to help your family financially now, or pass on the wealth that remains after your death, the process of estate planning can come with some hurdles along the way. Understanding these obstacles, and preparing for them in advance, could make all the difference in the future.

Read on to find out two core estate planning challenges you and your family may face, and how working with a financial adviser can help you overcome them.


1. A high Inheritance Tax bill

Inheritance Tax (IHT) has been in the news again recently – and for good reason.

IHT is usually paid on estates that surpass the “nil-rate bands”, which are allowances that protect some of your wealth from a tax bill after you die.

As of the 2023/24 tax year, the nil-rate bands break down into two categories:

  • The £325,000 nil-rate band, which applies to all taxable assets.
  • The additional £175,000 residence nil-rate band, which applies only to property passed to direct descendants. Your spouse is exempt from the residence nil-rate band, as they are covered by the spousal exemption.

So, in theory, your beneficiaries could receive up to £500,000 in assets without paying a penny of IHT.

While passing on this amount of wealth tax-efficiently is a positive thing for your family, IHT takings are increasing in the UK. FTAdviser reports that IHT receipts grew by £1 billion year-on-year between April 2022 and March 2023.

This rise in tax liability can largely be attributed to one key factor: the nil-rate bands have been frozen at their current levels until 2028. In fact, the £325,000 nil-rate band has stood at this level since 2009 – a “deep freeze” that interactive investor reports has cost bereaved families an average of £62,000 in IHT.

As your estate accumulates value over the years, it becomes increasingly likely that it will surpass the nil-rate bands, making a larger portion of your assets vulnerable to IHT. Without a tax strategy in place, your loved ones could face an unnecessarily high tax charge when you die.

“Giving while living” could help you reduce your loved ones’ IHT bill down the line

You could be wondering: “is there a way to mitigate IHT, even in the face of frozen thresholds?”

Yes, you can. In fact, employing a “giving while living” strategy can have two simultaneous benefits for your family:

  1. Reducing the value of your estate before you pass away. By giving some of your wealth to your loved ones in the years leading up to your death, they may pay a reduced IHT bill later on.
  2. Providing your family with amazing life opportunities now, rather than later. If your loved ones are reaching important milestones now, it could be a huge help to provide them with financial assistance sooner rather than later.

If you’re considering giving some wealth away now to reduce IHT down the line, it’s important to be aware that these financial gifts are subject to an allowance called the “annual exemption”.

Your £3,000 annual exemption can help you give money to your loved ones gradually

The annual exemption limits how much you can give away tax-efficiently each year. As of 2023/24, it stands at £3,000. So, you can usually give up to £3,000 a year, split across however many people you like, tax-free.

Although this may not seem like a huge amount in the grand scheme of things, maximising your annual exemption over the coming years could be surprisingly effective.

For instance, if the annual exemption remains the same for the next 20 years, you could reduce your estate by a total of £60,000 in that time. Meanwhile, you’ll be providing your children and grandchildren with a helpful financial boost as they go through life.

If you exceed your annual exemption within seven years before you die, the amount in excess of £3,000 could still be subject to IHT. The rules around these “potentially exempt transfers” (PETs) are complicated, but the bottom line is that exceeding the £3,000 limit could result in a tax bill later on.

Overall, giving while living can be instrumental in reducing IHT. If you want to know how much you can afford to give to your loved ones over time, speak to a financial adviser to learn more about long-term estate planning.


2. A lack of communication within your family

Another estate planning hurdle your family could meet in the coming years is not a financial one, but an emotional one. Planning for your family’s financial future is one thing; communicating about your plans is another.

Indeed, according to Money Marketing, UK adults are “vastly overestimating” the amount of inheritance they are set to receive, saying they anticipate a £132,000 windfall. In actual fact, the average inheritance in the UK between 2017 and 2019 was £50,000.

This example clearly shows the importance of communication when you’re making your estate plans. Once you’ve firmed up your position with your financial adviser by your side, the next step is to sit down with your loved ones and explain the plans you’ve put in place.

These conversations could include:

  • How much you plan to part with in your giving while living strategy, and who will receive the funds
  • The amount you believe you’ll pass down when you die, and the approximate IHT liability it may accrue
  • Any wishes you have for how the money will be used by your loved ones. For instance, you could have set aside a certain amount to help a child buy their first home.

Remembering to have these conversations as early and as frequently as possible can remove any surprises down the line. The clarity such discussions can bring may also help your loved ones manage their expectations for the money they’ll receive.


Get in touch

To discuss the estate planning process with a financial expert, email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.


Please note

This article is for information only. 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 will writing.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.