King’s Coronation: Protecting your legacy

As the country prepares to celebrate King Charles’s coronation, we look at the financial legacy left by his mother Queen Elizabeth and how you can ensure your own legacy is protected.

Friends, family and neighbours will come together on Saturday 6 May to celebrate the first coronation of a monarch in the UK for 70 years, as King Charles III is officially crowned at Westminster Abbey alongside Camilla, the Queen Consort. While Charles automatically became King when his mother Queen Elizabeth II died on 8 September 2022, the coronation acts as a symbolic ceremony to formally mark the transfer of the monarch's title and powers to Charles.

As the longest reigning British monarch, and the longest verified reign of any female monarch in the world, Queen Elizabeth will no doubt enjoy an illustrious legacy like no other. Her financial legacy, meanwhile, benefited from unique rules designed to protect the royal family’s assets, following a notorious deal struck with the then Conservative prime minister John Major in 1993. 

The monarch's assets are split into those owned privately and those owned as part of the crown estate. The latter cannot be sold by the monarch, as they are considered heritage assets for the benefit of the nation, so are treated as exempt from inheritance tax. However, the monarch’s personal wealth, which in the Queen’s case was estimated in the 2022 Sunday Times Rich List at £370m, was previously seen as applicable for inheritance tax just like anybody else’s assets.

Sovereign to sovereign

Under the terms of the deal, any inheritance passed “sovereign to sovereign”, or from the consort of a former sovereign to a sovereign, is completely exempt from inheritance tax. These rules don’t apply to anyone else, so anybody other than Charles who benefited from Queen Elizabeth’s inheritance would have been liable for paying inheritance tax in the normal way. 

For them, and the rest of us excluded from the royal inheritance tax exemption, planning is crucial to preserving your financial legacy for your loved ones. Thanks to rising property prices, millions of people now fall within the scope of the inheritance tax. The inheritance tax nil rate band threshold of £325,000 is barely higher than the average price of a house in the UK.

Your inheritance tax nil rate band allowance grows by a further £175,000 if it includes a residential property which is being passed onto your children, though it does taper if the overall estate is worth more than £2 million.

If the estate of the first person in a marriage or civil partnership to die is passed in full to their partner, the survivor also inherits their nil rate bands, meaning your total combined inheritance tax free bands are up to £1 million if your estate includes a residential property being passed on to your children.

No inheritance tax is chargeable on anything left to a spouse or civil partner. But if beneficiaries are anybody else including children or grandchildren, and the value of your estate is likely to exceed your nil rate band thresholds inheritance tax is broadly charged at 40%. Financial planning strategies can help to protect your legacy in the most tax-efficient way. 

“When people think about tax efficient investments, their first port of call is thinking about an ISA. But ISAs form part of your estate, whereas, in most cases, pensions do not,” says Karandev Digpal, Independent Financial Adviser at Ascot Lloyd.

Limitless pension savings

With the announcement in the Spring Budget that the lifetime allowance is being abolished over the next two tax years, pensions could be an even better vehicle for protecting your legacy from inheritance tax. Previously the value of your pension pot would be 'tested' at several stages, including at 75 or on death under age 75, to see if it exceeded the lifetime allowance. It meant if your pension was valued over £1,073,100 at these points it could be depleted by a tax charge. In the current tax year, the tests continue to apply, but rather than a tax charge of 55% being applied on any excess pension amount over the lifetime allowance, for the current tax year the rate of charge is at 0%.

Pension funds are typically free of Inheritance Tax (though there are exceptions) provided the scheme trustees/administrator have discretion over the payment of death benefits. Inherited drawdown also allows inherited pension wealth to remain outside the beneficiary’s estate. Excess pension amounts above the lifetime allowance withdrawn by Beneficiaries will be taxed at their marginal rate of income tax, whether taken as a lump sum or more gradual pension drawdown. says Digpal, “but it’s a crucial part of legacy planning to be aware of. It means thinking much broader than just pensions, such as considering a gifting strategy.”

Any assets gifted more than seven years before the donor dies are exempt from inheritance tax. If the donor dies within seven years of the gift, its value will reduce the value of the £325,000, nil rate band. If the lifetime gift exceeds the nil rate band inheritance tax will be due, typically payable by the donee, albeit at a lower rate if the donor survives at least three years. There is, however, an annual gift allowance of £3,000 to take advantage of, or £6,000 if you did not use it last year.  

“By thinking ahead, you can take advantage of gifting rules to minimise the value of your estate,” says Digpal. “Setting up a trust is also a great way of reducing the amount of tax your loved ones will have to pay when they inherit your financial legacy. There are numerous different trusts and structures to suit your individual goals which can be very complicated, so it’s very much recommended to engage with a trusted independent financial advisor to help guide you.

“For some time now, the government has been pushing people to take ownership of their retirement, and you should see your legacy as part of that. You worked hard for your legacy so don’t see it depleted by tax if through careful planning that could be easily avoided. Unfortunately, we can’t all enjoy royal inheritance tax exemption, but we can plan for the future.”

If you’d like to speak with one of the trusted Independent Financial Advisers at Ascot Lloyd about protecting your legacy from inheritance tax, click here to book a call back.