Estate Planning UK: Wills, Trusts & Your Legacy

What Is Estate Planning?

Estate planning is the process of arranging your financial affairs so that your wealth is distributed according to your wishes when you die, while minimising the tax burden on your beneficiaries. It encompasses writing a will, considering the use of trusts, planning for inheritance tax (IHT), setting up powers of attorney and ensuring your pension and life insurance nominations are up to date.

Without proper estate planning, your estate may be subject to the rules of intestacy (if you die without a will), your family could face an unexpected and substantial IHT bill, and the administration of your estate could be delayed and costly. Estate planning is relevant to everyone, not just the very wealthy.

Writing a Will

A will is the cornerstone of any estate plan. It sets out who inherits your assets, names the executors who will administer your estate, and can include guardianship provisions for minor children. Without a valid will, the intestacy rules determine how your estate is divided—and the result may not reflect your wishes.

Under intestacy rules in England and Wales, if you are married with children, your spouse receives the first £322,000 of the estate plus personal possessions, with the remainder split equally between the spouse and children. Unmarried partners receive nothing under intestacy, regardless of how long they have lived together. This makes having a will particularly critical for cohabiting couples.

You can write a will yourself, but it is strongly recommended to use a solicitor or professional will writer to ensure it is legally valid and properly drafted. A simple will typically costs £150 to £300, while more complex wills involving trusts may cost £500 or more.

Understanding Inheritance Tax

Inheritance tax (IHT) is charged at 40% on the value of your estate above the nil-rate band of £325,000. This threshold has been frozen since 2009 and is set to remain at this level until at least 2028. There is an additional residence nil-rate band (RNRB) of £175,000 available when you leave your home to direct descendants (children, grandchildren), bringing the total threshold to £500,000 per person.

Married couples and civil partners can transfer any unused nil-rate band to the surviving spouse, potentially giving a couple a combined IHT threshold of up to £1 million. Transfers between spouses are exempt from IHT entirely.

Using Trusts in Estate Planning

Trusts are legal arrangements that allow you to set aside assets for the benefit of others (beneficiaries) while retaining some control over how and when those assets are distributed. They are a powerful estate-planning tool with several applications:

• Discretionary trusts – give trustees flexibility over how income and capital are distributed among a group of beneficiaries
• Bare trusts – hold assets on behalf of a named beneficiary who has an absolute right to the capital and income at age 18
• Life interest trusts – allow one person (often a surviving spouse) to benefit from the assets during their lifetime, with the capital passing to other beneficiaries (often children) on their death
• Loan trusts and discounted gift trusts – specialist IHT-planning trusts that allow you to make gifts while retaining access to income or capital

Trusts can be complex and have their own tax rules. Assets placed into most trusts are treated as chargeable lifetime transfers for IHT purposes, and trusts may be subject to periodic charges every ten years. Professional advice is essential.

Gifts and the Seven-Year Rule

Making gifts during your lifetime is one of the most straightforward ways to reduce the value of your estate for IHT purposes. Outright gifts to individuals are classified as potentially exempt transfers (PETs). If you survive for seven years after making the gift, it falls outside your estate entirely and no IHT is payable.

If you die within seven years, the gift is brought back into your estate for IHT purposes, although taper relief reduces the tax rate on a sliding scale from year three onwards. In addition, several annual exemptions are available: the £3,000 annual exemption, the small-gifts exemption (£250 per recipient), and exemptions for gifts on marriage.

Powers of Attorney

An often-overlooked part of estate planning is setting up Lasting Powers of Attorney (LPAs). There are two types: a Property and Financial Affairs LPA, which allows someone you trust to manage your financial matters if you lose mental capacity, and a Health and Welfare LPA, which covers decisions about medical treatment and care.

Without an LPA in place, your family may need to apply to the Court of Protection for a deputyship order if you become incapacitated—a process that is slow, expensive and stressful. Registering LPAs while you are fit and well is straightforward and costs £82 per document.

Life Insurance and Pensions

Life insurance policies written in trust are paid directly to the beneficiaries without forming part of your estate, meaning they are not subject to IHT. If you have a life insurance policy that is not currently in trust, consider setting up a trust now—it is usually a simple process that your insurer or adviser can help with.

Pensions also have favourable IHT treatment. Most defined-contribution pension funds can be passed to beneficiaries free of IHT, and if you die before age 75, the funds can be drawn tax-free. This makes pensions a highly efficient vehicle for passing wealth to the next generation.

Get Expert Help

Estate planning involves the interplay of wills, trusts, tax law, pensions and insurance. Getting it right requires specialist advice tailored to your personal circumstances. A qualified financial adviser can help you develop a comprehensive estate plan that protects your wealth and provides for your family. Find a financial adviser through Nesto to start planning your estate today.