What could happen to your wealth without estate planning?

What is estate planning and what could happen to your wealth without it?

Published: 12 Apr 2020 Updated: 13 Jun 2022

Your Inheritance Tax bill could be bigger than is necessary

Many people start estate planning because they want to reduce the size of the Inheritance Tax bill they leave behind, so that more of their money can be passed on to their beneficiaries. Usually, any part of your estate that doesn’t fall within your nil rate band and isn’t covered by any other exemptions will be subject to Inheritance Tax at 40%. This means that if you plan to pass on all of your assets to the next generation but you don’t take any action before your death, you could leave behind a big tax bill.

What can you do?

A simple way to overcome this issue is to start passing on your assets earlier in your lifetime. You get a range of Inheritance Tax exemptions for passing on assets – gifts within these exemptions immediately leave your estate, potentially reducing the future Inheritance Tax bill. We talk about the rules in more detail in our guide to financial gifts.

Bigger gifts that aren’t covered by the exemptions could also be tax-free if you survive for at least seven years after making them. This is known as the seven-year rule. It means that if you want to make bigger gifts and can afford to give the assets away earlier in your life, you could save a lot of Inheritance Tax – and more money will go to your beneficiaries.

Your beneficiaries could be put in a tight spot when paying your bill

When you die, your assets can’t be distributed to your beneficiaries in line with your Will until your Inheritance Tax bill has been paid. But because most assets can’t be used to pay the bill (with some exceptions), the money must come from elsewhere. This can create a catch 22 situation for your beneficiaries – the tax needs to be paid but the assets from the estate may not be available to pay it, and they may struggle to find the money.

What can you do?

The first step is to speak to a financial planner to find out how much the Inheritance Tax bill is likely to be. Once you know this, you could set up a life insurance policy that will pay out an amount equal to the value of the bill. You will pay regular premiums and when you die the insurance company will pay a lump sum that can be used to pay the bill.

If you go down this route it’s important to make sure that the life insurance policy is set up in trust. This ensures that your beneficiaries quickly receive the payout. Otherwise, it will be paid into your estate, be subject to Inheritance Tax and – like the rest of your money – won’t be available to your beneficiaries until the tax bill has been paid.

Your plans might not come to fruition after you’re gone

Many people have specific ideas about how they want their money to be used by the next generation, or when it can be accessed. For example, you may want to leave money for a house deposit.

If you make a direct cash gift there’s no guarantee that your plans will come to fruition after you’re gone. There could be the risk that:

  • The beneficiaries will choose to spend the money as they please
  • They may be too young or inexperienced to look after the money, or they might be suffering from a health condition that means they can’t look after it
  • They could get divorced or go bankrupt, and potentially lose the money in the process

What can you do?

One way to keep some control over your money is to make a gift into trust. You place the money in trust and choose a number of trustees. The trustees’ job is to look after the money and give it out to the beneficiaries. They can decide the most appropriate time to pass the money to the beneficiaries. You can leave your wishes with the trustees and specify who the money should go to, when it should be given and how it should be spent – helping to ensure your plans come to fruition.

Want to find out more about estate planning?

Listen to our estate planning podcasts

Ian Dyall and Jocelyn Davis, our estate planning technical specialists, recently sat down to record two special estate planning editions of The Tilney Investment Podcast. They’ve answered your questions and given lots of helpful tips and insights into estate planning, Inheritance Tax and making gifts. Listen to the podcasts to find out more.

Listen to the podcast

Speak to an expert about estate planning

Our financial planners spend their days helping people with estate planning – from calculating the size of their future Inheritance Tax bill to showing them how much they can afford to give away and advising on setting up trusts. To find out if they could help you, please book a no-obligation initial consultation.

Book a consultation

If you have any questions or would like to know more, please call us on 020 7189 2400.

Advice in relation to trusts and Inheritance Tax planning is not regulated by the Financial Conduct Authority, however, the products used in relation to trusts and to mitigate tax may be regulated.


This article was previously published on Tilney prior to the launch of Evelyn Partners.