Despite having the ring of a phrase coined by Charles Dickens, estate preservation is a subject that is very definitely relevant for our modern times.

This term describes the process of assessing, managing and protecting your wealth and assets while you are alive, while putting the necessary plans and measures in place to ensure they will be dealt with according to your wishes after you die or become incapacitated.

Today, various factors are conspiring to make estate preservation an important area of focus for anyone concerned about their financial legacy. With shrewd planning, it can mean maximising the support provided to loved ones and only meeting the tax obligations that fit with your circumstances. Without appropriate forethought, it can mean a greater share of your wealth is filtered through to the government unnecessarily through tax or that inheritance is not allocated in the way you would choose.

Two key forces at play

Inflation and inheritance tax regulations are the two primary factors driving the need for proactive estate preservation. Property price inflation in particular means that the value of houses – typically most people’s most significant asset – has continued to rise in recent years, with sales and valuations currently at all-time highs.

Despite the escalation of these figures, however, the bands at which people pay inheritance tax (IHT) have been fixed for more than a decade. The net result being that people are more likely to exceed these thresholds and trigger 40% IHT payments across their estate after their death.

Currently, there is no IHT to pay on the first £325,000 of your estate – the nil-rate band – which the government has fixed until April 2026. Anything over this threshold is also free from IHT if it is left to your spouse or civil partner, or if you decide to bequeath it to a charity of a community amateur sports club.

The Residence Nil-rate band (RNRB) enables a further £175,000 to be passed on to direct descendants based on the value of a qualifying residence, resulting in a potential IHT-free total of £500,000. It is worth noting that tapering on the RNRB can impact this amount, however, since it is reduced by £1 for every £2 that the net value of an estate exceeds £2 million.

The latest tax data released provided by HM Revenue & Customs provides concrete evidence that rising property wealth and fixed tax thresholds are having an impact on the legacy wealth being retained within families. The Exchequer pulled in more than £700 million in additional IHT receipts year-on-year for the period between April 2021 and March 2022.

Plans for passing on wealth

Getting to grips with estate preservation might seem a daunting task, which is why the process should always start by drawing up a plan based on the answers to several key questions. These include how much your estate is worth, who you would want your estate to pass to, and whether you want your wealth to support particular objectives, such as paying for education fees or helping younger generations onto the property ladder.

A sensible next step is to ensure those plans are formalised in a Will. The idea of preparing a Will can be uncomfortable for some – one of the reasons that an estimated 53% of people don’t have one in place – but it provides important clarity on how money and possessions are divided after your death.

Without a valid Will in place your estate will be shared out according to the default rules of intestacy. This can prevent wealth being passed on to an existing partner (where the two are not married or in a civil partnership) while former partners could still have rights if they are separated but not divorced. In cases where there are no surviving relatives, intestacy results in the estate passing to the Crown.

There are various reliefs available that could make it possible to minimise your IHT liability while satisfying the objectives set out in your financial legacy planning. Gifting, for example, provides the means to distribute money or items up to the value of £3,000 each year that will be exempt from IHT. Any unused part of this allowance can be carried forward to the following year, after which it will be forfeited.

Trusts also another option for facilitating the transfer of wealth to dependents, such as children or grandchildren. By placing money outside of an estate and into the supervision of trustees, trusts are largely beyond the purview of IHT and do not involve probate. There are several different structures available, and it is also possible for life insurance policies to be incorporated into a trust, guiding where any money paid out should be directed.

These are just some of the levers available to individuals being squeezed by stagnant tax thresholds and rising inflation. Taking advantage of these strategies is key to effective estate preservation planning, ensuring the value of your legacy wealth is protected and the ambitions crystallised in your lifetime can be realised in the future.

The information contained within this communication does not constitute financial advice and is provided for general information purposes only. No warranty, whether express or implied is given in relation to such information. Vintage Wealth Management or its associated representative shall not be liable for any technical, editorial, typographical or other errors or omissions within the content of this communication.