Contractors with no will in place may fear inheritance reforms

Many contractors assume that when they die their children will inherit the lion’s share of their estate but this could be about to change under proposed legislation to ensure a spouse will inherit everything when there is no will in place, writes Tony Harris of freelancers' IFA ContractorMoney.

Spouses or civil partners to become the main beneficiary

For contractors with no will in place, this means changes as a result of current consultation by the Ministry of Justice could affect how much your children are entitled to, and could be especially significant if you have remarried but have children from a previous marriage.

Why should you make a will?

A will can be a very difficult subject to talk about but it is vital that contractors ensure one is in place and that it is accurate, up-to-date and correctly written to ensure assets are shared fairly and according to your wishes. Without a will, you run the risk of your assets, your home and even your children falling into the wrong hands, so it is arguably the most important document you will ever write. This also applies to your parent’s estate too and while this is obviously a very sensitive subject, there is no time like the present to address this all-important area. Even the MoJ acknowledges that they are contemplating changing areas of the law with implications for families at “times of financial and emotional vulnerability.”

Your options for making a will

Although there are cheap ‘DIY’ options out there, these may prove far more costly in the long run because your family will have to pay to fix the problems that you leave behind. Mistakes can also be extremely costly in terms of any tax liabilities too, but with a carefully planned will you can minimise your families inheritance tax liability (IHT) for instance. We urge contractors to consider the old adage of 'cheapest doesn't equal best' when it comes to will-writing. This is one area where we believe that saving money by shopping for a will at the newsagents or worse still, at the supermarket certainly doesn't pay.

Regardless of the outcome of the consultation, which is due to end on May 3rd, without a proper will in place much of your estate could end up in the taxman’s hands. There are a number of different ways to save on this dreaded tax and with a little planning and a good will; you can make sure your loved ones are the ones to benefit from your years of hard work contracting.

Gift now and save future tax

If you start planning early for IHT then there are a wide variety of options available to you or your parents. Gifts can be made to loved ones that are free from IHT as long as you make them at least seven years before you die and don't retain any benefits. For example, if you wanted to gift away your house then you would not be able to continue living in the property unless you pay rental at the market rate. The gift method is therefore more suitable for passing on money or possessions.

More modest regular payments from your income are totally exempt as long as they do not affect your standard of living but, it is important to keep a record of any payments made. It is a good idea to keep a file with details of any gifts made, including the dates, amounts and who they were gifted to. This will save any IHT problems later on.

Protect your assets with trusts

A trust can be a useful tool in lowering your (or your parents’) IHT liability without losing control of the estate. These can be helpful if beneficiaries are very young or may be about to divorce and there is a need to protect the assets for them. They can also be useful if you or your parents are going into long-term care, as putting your assets into a trust could prevent them from being counted when the liability for care costs are calculated.

If assets are in a trust and therefore deemed to be outside of the estate, then they should not be considered when you are assessed for help with the costs of long term care and this can save your estate a fortune. As with gifts, certain trusts can take seven years to leave your estate for IHT purposes, but trustees are able to alter how the trust’s assets are distributed and as such there is more control. There are also trusts that allow you to set them up to provide an income for you and others that enable some of the assets and any growth to be immediately classed as outside of your estate.

Your life insurance policies can also be put into trust which prevents them from being liable to IHT when paid out on death. It is important that you ask for this when you set up your life insurance policy as unlike pension providers, many insurers and advisers without the specialist estate-planning knowledge required will not automatically put your policies into trust.

This is particularly important if you pay your life insurance through your limited company as you will need to have a trust in place to ensure benefits are paid directly to your trustees, rather than into the company account where they would be liable for tax deductions. This is the reason why we favour the new’ relevant life’ insurance plans that we helped to introduce to the market. As advisers, we are replacing personally funded life cover in favour of relevant life as these not only avoid IHT but also have no benefit in kind implications and can be classed as a legitimate business expense for corporation tax purposes.

Final thought…

Lastly, whether you are an umbrella or limited company contractor, when it comes to making a will, a good IFA should not only help you make sense of your affairs and meet any protection needs, but should also offer access to very reasonably costed legal work, available to you either remotely or via face-to-face meetings.