Estate planning is often overlooked. However, it is one of the most crucial steps one can take to ensure their assets are managed and distributed according to their wishes. Whether you have a modest estate or considerable wealth, having a plan in place can provide peace of mind, protect your loved ones, and prevent potential disputes. 

Tax laws in the UK are increasingly complex, with Inheritance Tax (IHT) in particular being of concern for many families. The recent changes in the autumn Budget have added an extra challenge. Many families whose estates may previously have been outside the IHT threshold will now have been dragged into it through their pension value.

You’ve worked hard to build your family’s wealth – the last thing you want to do is give it all away to the tax man when you die.

 

What is an ‘estate’?

First things first, let’s be clear on what constitutes an estate.

In this context, an estate refers to the total sum of a person’s assets, rights, and liabilities at the time of their death. This includes everything an individual owns or has a legal interest in, such as:  

  • Property: Homes, land, or other real estate.
  • Financial Assets: Bank accounts, savings, investments, stocks, bonds, and pensions.
  • Personal Possessions: Valuables such as jewellery, cars, art, and collectibles.
  • Business Interests: Ownership in companies or partnerships.
  • Liabilities: Any outstanding debts, such as mortgages, loans, or credit card balances, which must be settled from the estate before distribution.

In estate planning, the term is used to describe the collection of these assets and liabilities, which are managed and distributed according to the individual’s wishes through tools like wills, trusts, and other legal arrangements.

 

Protecting Your Assets

There are two main reasons for estate planning:

  • to protect your assets during your lifetime, and
  • to ensure they are distributed as you desire after your death as tax-efficiently as possible. 

A key piece of the estate planning puzzle is your Will. It’s vital to have a valid Will in place that clearly sets out your intentions for your estate. This should be kept updated to encompass major life events. For example, not many people realise that a Will becomes invalid upon marriage, but not upon divorce. Let’s say you got married, made a new Will, then got divorced without updating your Will. In this scenario, the version made after your marriage would still be valid and may include your ex partner as a beneficiary.

If you were to make a Will, then marry and then divorce your spouse without creating a new Will at any point, your estate would be considered ‘intestate’ (absence of a valid Will). In this scenario, upon your death your estate would be divided equally between your children. In the absence of children, it would go to any surviving parents. If they are no longer living, the Rules of Intestacy follow a specific chain to find living relatives to distribute the estate to. If none are found, the estate passes to the crown.

This could result in loved ones receiving less than you intended, or assets being distributed in ways that do not align with your wishes. Proper estate planning will ensure that you have control over how your property, savings, and investments are handled, even after you have passed away.

 

Minimising Inheritance Tax

Inheritance Tax is a significant consideration when planning how to pass on your estate. Under current rules, every person living in the UK has a personal tax-free threshold of £325,000. This means that anything in your estate up to that value is exempt from IHT. Anything over the threshold is taxed at 40%. 

If you are married, and you die before your spouse, your personal threshold can pass over to them to create a rolled up tax-free threshold of £650,000. There is no inheritance tax to pay on the first death, as the estate will simply pass into full ownership of the surviving spouse.

Additionally, if you leave your home to your direct descendants, you can benefit from an additional £175,000 tax-free allowance, creating an effective threshold of £500,000 (or £1m per couple).

Recent changes to IHT

Until the Autumn 2025 Budget, IHT only applied to a small percentage of estates. However, the thresholds have been frozen since 2021 and will remain so until at least 2030. We’ve all been keenly aware of how inflation has impacted our finances and the economy over the last few years. The freeze has effectively dragged many more estates into the taxable bracket, as house prices have risen substantially. Other assets may also have experienced a similar appreciation in value. 

Add that to the fact that pensions are now included as part of a person’s estate (whereas before they were fully exempt and could be passed on tax-free). The two together mean we now have a scenario where an increasing number of people will be liable for IHT over the next six years.

Engaging in estate planning can help to mitigate the amount of tax due and ensure that you’re able to pass on your estate in the way you want to. There are many ways to pass on wealth according to your intentions, such as lifetime gifting, setting up trusts, or making charitable donations. With a little forward planning, it’s possible to reduce the taxable value of your estate by the time of your death. This will allow more of your wealth to be passed on to your family, rather than being lost to taxes.

 

Planning for Incapacity

Estate planning is not just about what happens after you die. It also addresses how your affairs will be managed if you become incapacitated. Setting up a lasting power of attorney (LPA) allows you to appoint someone you trust to make decisions on your behalf if you are unable to do so yourself. There are two types of LPA in the UK: one for financial decisions and another for health and welfare. Having these documents in place is crucial. It will ensure that someone you trust is in charge of important decisions, from paying bills to making healthcare choices.

 

What next?

Perhaps the greatest benefit of estate planning is the peace of mind it provides. Knowing that your affairs are in order can alleviate anxiety about the future. You can focus on living your life fully, knowing it’s all taken care of. For your family, it offers clarity and guidance during a challenging time. It reduces the burden of uncertainty and helps them focus on their emotional needs.

Financial planning is only one element of estate planning. At Wealth Matters, we offer advice on the full estate planning process, including setting up trusts and creating Wills. Get in touch with your Wealth Matters adviser to get started with planning your estate.