The property, investments, savings and possessions you’ve built up over the years are a product of your hard work and dedication to your career in the medical profession.
So, when the time comes to distribute your estate, you want to make sure things are dealt with according to your wishes.
Estate planning is the process of arranging your affairs so that your money and possessions are passed on to the people you choose, in an efficient way.
Done properly, it can make the process of inheritance easier for your loved ones when you’re gone, reduce the amount of your estate that’s subject to inheritance tax, and use the allowances available to you.
How does inheritance tax work?
Inheritance tax is charged at a rate of 40% on the estate of someone who has died. That sounds simple, but the way the tax works in reality is far more complicated.
The nil-rate band
To begin with, there are two main tax-free thresholds to be aware of when it comes to inheritance tax: the nil-rate band and the residence nil-rate band.
The value of an estate up to the nil-rate band (which covers up to £325,000 in 2021/22) is free of tax.
If you’re passing on a family home to direct descendants, such as children or grandchildren, the residence nil-rate band may apply on top of this. This currently stands at £175,000, effectively increasing the amount you can pass on tax-free to £500,000.
Transfers between married couples
In addition to this, transfers between married couples and civil partners are not subject to inheritance tax – and when one partner dies, the other partner can inherit any unused threshold.
In effect, under the current thresholds, this means the surviving spouse or civil partner could pass on as much as £1 million free of tax to their direct descendant.
Then you need to factor in gifting rules. Inheritance tax can sometimes apply on the gifts a person gives less than seven years before their death, also known as the ‘seven-year’ rule.
There are various different exemptions to this, each with different rules attached, which are important to know about as part of your later-life planning. You can find out about these in more detail on the Government website, or speak to us for more information.
Write a will
Writing your will is a vital part of estate planning. Without it, your estate could be distributed according to the rules of intestacy – the standard rules for dividing up an estate.
These might not align with the way you’d like things to be given out, and in many cases they can result in a higher than necessary tax charge.
In your will, you should set out who you wish to benefit from your estate after you die. You’ll also need to name an executor who will make sure your wishes are carried out.
To write a legally valid will, you need to be sound of mind, and you need to be witnessed signing it by two people over the age of 18 who are not your beneficiaries. Those two people then need to sign the will themselves.
Passing on wealth
Writing your assets into trust is one way to protect them from inheritance tax, as these generally fall outside of the value of your estate.
It is possible, however, that a tax charge will apply to transfers you make into trusts if they exceed certain thresholds or fall within the seven-year rule. Again, this is a complex topic, so talk to us before factoring trusts into your estate plan.
Pensions can help you save tax
Pensions are another tax-efficient savings vehicle, which normally fall outside of your estate. You can nominate someone you would like to inherit your savings by contacting your pension provider.
Maximising your £40,000 annual allowance for pension savings is usually a good strategy, but medical professionals should be aware of the implications of doing so under the NHS pension scheme.
In particular, high-earning individuals could be at risk of triggering the tapered annual allowance, which reduces the amount they can save tax-free.
Estate Planning and Tax Planning go hand in hand
Finally, remember that estate planning shouldn’t be done in isolation to the rest of your personal and business tax planning. As you consider the future, take into account your plans for retirement, and how your financial position might change over time.
If you’ve opened your own GP practice, for instance, make sure you have an exit and succession plan in place, and you know what will happen to any jointly-owned assets in the event that one of the partners passes away.
At each major life event, whether that’s a career milestone or a change within your family, it’s a good idea to review your plan and make sure it still suits your circumstances.
As specialists in accounting for doctors, we can help you to untangle the tax rules and prepare for the future.