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Money, tax and benefits

Money, tax and benefits

Inheritance planning

Planning your finances in advance should help you to ensure that when you die everything you own goes where you want it to. This could help you provide a sound financial future for your family.

Making a will

Making a will is the first step in ensuring that your estate is shared out exactly as you want it to be.

If you don't, there are rules for sharing out your estate - called the Law of Intestacy - which could mean your money going to family members who may not need it, or your unmarried partner, or a partner with whom you are not in a civil partnership, receiving nothing at all.

If you leave everything to your spouse or civil partner there'll be no Inheritance Tax to pay because they are classed as an exempt beneficiary.

Or you may decide to use your tax-free allowance to give some of your estate to someone else, or to a family trust (see the section on 'Trusts' below).

Joint and common ownership of property

If you and your spouse or civil partner own your home as 'joint tenants' then the surviving spouse or civil partner automatically inherits all of the property.

If you are 'tenants in common' you each own a proportion (normally half) of the property and can pass that half on as you want.

If you want to change the way you own your property a solicitor will be able to help you.

Gifting your home to your children

If you want to give your home away to your children while you're still alive, you might want to bear in mind that:

  • gifts to your children - unlike gifts to your spouse or civil partner - aren't exempt from Inheritance Tax unless you live for seven years after making them
  • if you keep living there without paying a full market rent (which your children pay tax on) it's not an 'outright gift' but a ' gift with reservation' so it's still treated as part of your estate, and so liable for Inheritance Tax
  • from 6 April 2005 onwards you may be liable to pay an Income Tax charge on the 'benefit' you get from having free or low cost use of property you formerly owned (or provided the funds to purchase)
  • once you have given your home away your children own it, it becomes part of their assets; so if they are bankrupted or divorced, your home may have to be sold to pay creditors or to fund part of a divorce settlement
  • if your children sell your home, and it is not their main home, they will have to pay Capital Gains Tax on any increase in its value

Downsizing to a smaller property

If you decide to downsize to a smaller property and give away the proceeds of the sale of the larger property, these gifts may qualify as:

  • 'potentially exempt transfers' (PETs) so they wouldn't be taxable unless you die within seven years
  • part of your annual exemption in £3,000 chunks each year

For example, if you give £10,000 away, £3,000 will be exempt under your annual exemption and £7,000 will be a PET. 

Trusts

You may decide to use a trust to pass assets to beneficiaries, particularly those who aren't immediately able to look after their own affairs.

If you do use a trust to give something away this removes it from your estate, provided you don't use it or get any benefit from it. But, bear in mind that gifts into trust may be liable to IHT. Trusts are complicated and it's best to get specialist professional advice.

Equity release

A commercial equity release scheme is a method of using the value of your home to raise money. This is like having a mortgage on your property but, instead of making monthly repayments, you repay the money when your house is sold. You can use these schemes to:

  • buy an annuity to give yourself a regular income for life
  • release cash to invest or spend as you want

Before using a commercial equity release scheme you need to get proper advice because there are risks:

  • the interest rate is fixed at the time you release the money - if the value of your home falls or doesn't grow by enough you could end up with no equity in your home
  • if you change your mind after taking out the loan you could face substantial penalties

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