Women And Wealth: Minimising The Inheritance Tax Burden
This practitioner examines the knowledge gap between women and men where IHT is concerned; and what measures, as they become primary wealth holders, women should take.
Recent studies show that women are likely to pay more inheritance tax than men, in large part due to a lack of financial and succession planning. A UK survey conducted by Opinium found that 37 per cent of women said they did not understand the rules of IHT, compared with 25 per cent of men. Yet women are now holding more wealth than men, says Helen Barnett, senior associate at law firm Wedlake Bell. Figures from the Office for National Statistics confirm that female-owned taxable estates have a net capital value of £13.6 billion, while it is £12.3 billion for men. In this guest article, Barnett examines what is holding women back and what can be done to improve their wealth planning prospects. We welcome outside contributions, where the usual editorial disclaimers apply. Email feedback to firstname.lastname@example.org and email@example.com.
Married women often outlive their husbands, making a wife's estate more likely to be subject to IHT than a husband's estate as the IHT spouse exemption applies once the first spouse has died. But this does not account for the apparent knowledge gap between men and women when it comes to IHT planning. The Opinium study, mentioned above, reveals that around 19 per cent of the women surveyed were planning to gift part of their wealth to family or friends in the next five years. But just over half were unaware of the requirement to survive seven years from the date of making the gift in order to avoid paying IHT. And among those women who were planning to leave an inheritance to family or loved ones, 55 per cent of them said they had not made any financial plans, in contrast to 41 per cent of men.
Certainly amongst the older generations, it is still common for men to be in control of the finances for the family, having been educated in the way of family finances by their own fathers. As a result, women of these generations may feel insecure about taking decisions about money in general or IHT planning in particular if they do outlive their husbands. As women tend to live longer than men, their priorities may also be more geared towards ensuring that their assets last for their lifetime, rather than minimising tax.
There is also arguably still an underrepresentation of women in the world of financial planning. As financial and IHT planning has for so long been the preserve of men, many women may feel unsure about seeking advice. Organisations such as the WealthiHer Network have been created to try to address this issue, and to empower women to make their own financial choices in a way that suits their needs.
Thankfully the world is changing; women of the current generation are more financially independent, and financial and legal advisers are becoming more attuned to tailoring their advice to women's needs, with less jargon and more of a focus on what wealth means to women.
So how can women take control of their succession
planning in a tax efficient way?
There are various options available, depending on the level of wealth available, and every person needs to ensure that their long-term needs are going to be covered before they consider gifting assets or otherwise taking them outside the IHT net.
Making use of the gifting reliefs and
There are various reliefs and exemptions available, including:
* £3,000 annual allowance – every individual can give away up to £3,000 per year free of IHT.
* Small gifts allowance – in addition to the £3,000 annual allowance, one can give up to £250 per year to as many individuals as one chooses.
* Wedding/civil partnership gifts – one can give up to £1,000 per person to anyone on the occasion of their marriage/civil partnership, which goes up to £5,000 for a child or £2,500 for a grandchild.
* Charity exemption – all gifts to registered charities are exempt from IHT.
* Normal expenditure out of income – if someone has more income than they require to maintain their standard of living, they can gift any excess income (such as excess salary or income from an investment portfolio) free of IHT. It is a good idea to take advice before utilising this relief; HMRC will want to see detailed records to ensure that the income gifted was genuinely surplus to the individual's requirements.
* Any funds spent to maintain a dependent child (i.e. a child under the age of 18 or one who is still in full-time education) will be free of IHT.
Making outright gifts
An individual can gift any amount of money to another person outright; if they survive seven years from the date of the gift, the value of the gift will fall outside their estate for IHT purposes. If the gift is of assets other than cash, then Capital Gains Tax and (if the gift is of an interest in a property) potentially also Stamp Duty Land Tax will need to be considered.
Creating a trust
If an individual likes the idea of retaining a certain amount of control over the funds they are gifting, they can consider putting money into a trust, of which they could be a trustee. It is possible to put up to £325,000 into trust, every seven years, without IHT becoming payable for at least the first 10 years of the trust. If more than £325,000 is transferred into a trust, there will be an immediate charge to IHT at the lifetime rate of 20 per cent, unless other reliefs such as Business Property Relief or Agricultural Property Relief apply to the assets transferred into the trust. It is also important to consider the CGT implications of transferring assets other than cash into a trust.
Maximising pension contributions
Pensions are generally exempt from IHT, and if pension contributions are made from income, those contributions will qualify as 'normal expenditure out of income' so it makes sense to pay excess income into one's pension, whilst having regard to the lifetime limits of contributions.
There are other options available, depending on the individual's attitude to risk, personal needs and values. The hope is that more women will feel empowered to seek the advice they need to ensure that they can provide for their loved ones in the way they would like to in the most tax efficient way possible.