Q: I'm worried about the effect of the planned increase in probate fees, funeral costs and inheritance tax on my estate. I have two grown-up children and assets of more than a million, with a house worth £350,000 on top of that. My husband passed away a few years ago and I am now 75. What suggestions do you have for me?
A: Guy says:
I know it can be an uncomfortable subject but let's consider your life expectancy first. This is an important factor in any financial plan, but it is particularly important with inheritance tax (IHT) because some strategies take a while to take effect.
Having already reached 75, the national average for a woman today is for a further 13 years, taking you to the age of 88. Assuming you have normal health for your age, I don't think there is a need for any drastic or unusual planning based on fear of running out of time.
You're right to be concerned about probate fees because the Government announced a large increase last year which, is in effect, an additional tax. The threshold at which you'll need to pay probate fees will be £50,000 from April this year.
Below that level there will now be no fee, although this is unlikely to apply to you.
Estates worth between £50,000 and £300,000 will be charged £250, while the maximum charge is £6,000 for estates worth £2m or more. Based on what you've told me, your probate fee without planning is likely to be £4,000.
This is a small amount measured against the value of your estate; however, this has to be paid by your beneficiaries before probate is issued and money is distributed. Finding the money before they inherit from you could be an issue for your beneficiaries.
When you think about planning for IHT you should do an analysis of your likely spending and some contingencies in case you need care or other areas of higher than normal spending. It is quite motivating to minimise your tax liability, but you don't want to regret having given too much away.
The balance needs to be right between protecting the value of your beneficiaries' inheritance and your financial security. Given that you are concerned about how to reduce unnecessary tax, and with the size of your estate, it is very likely you will leave a large bill. The planning can be complicated but you should consider a few potential solutions.
Life assurance written in trust is a great way to transfer money you have today to your beneficiaries. Life assurance will pay out on death and even when you are older it is possible to get cover. However, this obviously comes at a price as the annual premiums will be very high.
The key is the affordability as this is just a way to move money from being directly in your name and estate into a trust. As with all life assurance policies, there is a risk that you live a long time and your premiums become much higher than your sum assured, although it is possible to protect against that (for a cost).
If life assurance doesn't work for you, don't forget about the annual gifting exemption, which is £3,000. These gifts are immediately outside your estate and, although each is quite small, the value will build up over time. Another option to consider is a loan trust where you can retain access to your capital but can put any growth outside of your estate.
One area I wouldn't yet recommend is business property relief. These investments under current legislation are exempt from IHT after only two years and are appealing to people who have left their planning late.
Given your age and likely life expectancy I don't think this applies to you. The disadvantages include higher charges and the risk is probably not worth the benefits for you yet.