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The UK’s Rich List came out this week, and I’m not on it. But it has made me think about my own net worth. This Sunday Times list is still dominated by financiers, hedge fund managers and property tycoons, but there is a good smattering of people we might be more readily identify with. Adele, a London gal, who is Britain’s wealthiest female singer ever, and the stars of Harry Potter Daniel Radcliffe, Emma Watson and Rupert Grint.
But back in the real world, tracking our own net worth isn’t a bad thing. What is common about all our positions is that we want to plan a financial future for our children to ensure they have a chance at the best life possible, and to be as independent as possible.
If the world’s richest man, Bill Gates, famously intends to leave his wealth to good causes because he wants his children to make their own way in the world, we don’t have that luxury. We have someone we love who probably won’t earn enough to have the things we – and they – need to live a comfortable life. They might have a purpose to their day, real paid work, but even an optimist like me has trouble imagining that my daughter will earn more than me. I need to leave her something.
I start by calculating my net worth. Net worth is simply everything you own minus everything
Assets – Liabilities (Debts) = Net Worth.
You can calculate your net worth using our free to download Excel spreadsheets.
There are 9 main things I track.
1) The balance in our current accounts, by current accounts I mean current accounts or online accounts that you pay your bills from for your day to day living
2) The balance in our savings accounts. I count the savings in my emergency fund; short term savings for holidays, christmas, birthdays etc; and my long term savings, that is savings that don’t have a particular purpose but are three months of my living expenses should something drastic happen in my life.
3) The balance of privately held shares, mutual funds and stocks and shares ISAs.
4) The value of our house.
5) The balance of our pensions / 401Ks. These are the workplace pension funds, where contributions are made before tax and where employers often contribute too.
6) The value of our cars. This is sometimes a tetchy one because what we pay for a car isn’t what it’s really worth one block away from the car showroom, so we need to count its resale value and not what we paid.
7) Anything else of significant value we own. If we were to count everything we owned, then the spreadsheet would be too long and too awkward to calculate. Here I tend to think of things worth more than a thousand pounds/dollars. The flat-screen TV I bought isn’t really worth what I paid for it if I put it on eBay.
8) The value of my business because I work for myself. These days many more of us are self-employed.
9) The value of any other assets such as rental properties not already mentioned.
Once we have listed the values of these assets in our spreadsheet, we need to list our debts. There are 5 main categories of liabilities I track.
1) Our mortgage. If you are currently buying your home what you owe to the bank.
2) Credit card debt. Most of us have credit cards, and if we haven’t paid off the balance we should track what we owe.
3) Similarly store cards. They are credit cards, no matter what is printed on the front.
4) Personal loans. Sometimes we buy big ticket items with a loan, and this should be tracked.
5) Car loans. It may be called a payment plan but it is still a loan.
After we’ve listed all of these, the spreadsheet churns out a number. This is our net worth, a before any inheritance tax, amount you could leave to your children to give them the life and level of independence you hope for them.
While my own net worth is never going to get me on the rich list, I like to think that with forward planning It will eventually be enough to provide my daughter with the financial security she needs to live an independent life.
Even if your net worth isn’t where you would like to be, you should congratulate yourself on doing more than most parents by thinking about the future, and planning towards it. We should pat ourselves on the back before we worry about whether we think it is good enough, as we resolve to move forward.
I don’t want to be overly morbid but someday I will die (but not in the near future I hope!). This, and knowing I have a daughter who might be vulnerable financially, has made me think and ask questions about exactly how my estate will be taxed when I’m gone. Yes the dreaded inheritance tax. I’m sure it exists in most countries, even if the rules and guidelines vary. And I also believe it is something we all need to think about. These are 5 things I’ve learnt so far.
Point 1 Your Estate
Your estate is everything you own (your assets). And by own it means own. Your estate is what you own minus what you owe (your debts). The value of all your assets (like a house, car, shares, cash in the bank etc) are added together. Then all your debts (like mortgages, car loans, credit cards and anything else you owe) is also added up. Then the total of your debts is taken off the total of your assets, and this is your estate for inheritance tax purposes. For example, if you have a house and possessions worth £1,000,000 but you have £100,000 worth of mortgage and loans, your estate is really only worth £900,000.
Point 2 Inheritance Tax is 40%
Inheritance tax is set at a flat rate of 40%, regardless of your income. It is not like income tax that goes up in bands, so you will be taxed at 40p for every £1. £40 for every £100. £40,000 for every £100,000.
Point 3 The ‘Nil Rate Band’
Everyone is entitled to a nil rate band when they die, which is an amount of money taken off your estate before any tax due. At the moment (2017) the nil rate band is £325,000.
Point 4 The new ‘Residence Nil Rate Band’
The government has recently brought in an extra ‘Residence Nil Rate Band’ allowance for the family home. This means if your home is part of your estate, then you get an extra tax-free allowance of £100,000. (This financial year it is £100,000, but that is going to rise to £175,000 by 2020.)
If you were a single parent leaving an estate worth a total of £900, 000, the sums would look like this:
So if you, as a single parent, leaving your children an estate of £900,000, they will pay £190,000 tax. In effect your children will receive an actual inheritance of £710,000.
Point 5 Passing on Nil Rate Bands
There is a rule that allows spouses to leave their nil rate bands to each other. This means if one spouse dies, their nil rate band can be passed to the other spouse.
So, if your spouse dies in May 2017 and then you die in November 2017, then your £900,000 estate would look like this:
So if you leave your children an estate of £900,000, they will pay £20,000 tax. In effect your children will receive an actual inheritance of £880,000.
Understanding these 5 points has made me realise I need spend more time thinking about how my estate will be taxed. It makes me realise the importance of the nil rate band and the residence nil rate band, because this reduces the amount my children will be taxed.
Don’t get me wrong, I won’t be doing this all by myself. I’ll be talking to the professionals. But I hope because I understand the basics about inheritance tax, I will know the right questions to ask.
Disclaimer: I write from my experiences as a father trying to plan a secure financial future for my daughter with additional needs. The material presented here is for educational purposes only. I am not qualified or regulated to give financial advice, and even if I was you should never make important decisions based on things you read on a blog. Every family’s situation is different, and you should seek qualified, professional advice from a tax or financial advisor who understands your unique situation, and then make your decisions accordingly. Good advice will pay for itself in the long run.