Family fortunes: are inheritance rights suitable for modern families? – Family and Marital
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“Maybe you’ll get married, maybe you won’t.
Maybe you’ll have kids, maybe you won’t
Maybe you’ll divorce at 40, maybe you’ll dance the ‘Funky Chicken’
On the occasion of your 75th wedding anniversary
Whatever you do, don’t congratulate yourself too much
Or yell at you either
Your choices are semi-random
So are to all others”
Mary Schmich (later Baz Luhrmann “Everyone’s Free (To Wear Sunscreen)”)
Pulitzer Prize-winning journalist Mary Schmich wrote these words in 1997 as an injunction to her readers to live their lives with no regrets. Her column, which was echoed in the lyrics of a global hit, provided advice on how to live a happier life and challenged traditional societal expectations, such as marriage and having children. children.
The Office for National Statistics recently reported that, for the first time, more than half of women in England and Wales are entering their thirties without children. Additionally, fewer people are getting married, and those who choose to do so do so later in life than ever before. Many will not marry at all, with cohabiting couples being the fastest growing type of family in the UK. Divorce rates have risen steadily and more and more people will have multiple spouses in their lifetime, while living alone is becoming an increasingly popular choice. Importantly, fewer people are having children and those who do are very likely to become parents much later than previous generations.
The common thread running through all these trends is that people are increasingly rejecting the “traditional” notion of the nuclear family. And where societal trends go, the law must surely follow if it is to continue to usefully serve society. Nevertheless, there is an argument that the Inheritance Tax (IHT) regime has not evolved over time, disproportionately benefiting those who conform to the so-called nuclear family structure, without taking sufficient account of a myriad of equally relevant life circumstances. That said, the importance of undertaking sound tax planning based on sound advice cannot be overemphasized, regardless of age and stage of life.
How does the inheritance tax system benefit traditional family structures?
Under the UK IHT scheme, on death each individual is entitled to a tax exemption threshold of £325,000 (known as the zero rate bracket). In simple terms, this means that for a single person with no children, they will only pay IHT if their estate exceeds £325,000. In this scenario, anything above the threshold is taxed at 40%.
For a married couple with no children, on the death of the first spouse, whatever remains to the surviving spouse goes to them tax-free. This means that, in many cases, the predeceased spouse’s zero rate band will remain unused within his or her own estate. However, this allowance may be transferred to the estate of the surviving spouse on his death (known as the zero-rate transferable tranche). This means a married couple has a total tax exemption cap of £650,000, above which tax is paid at 40%.
There is an obvious logic to the status quo in this scenario – many people consider that wealth developed during a marriage should be shared, and so they do not view assets passed to a spouse as an “inheritance” as such. It would also be clearly unpleasant for a grieving spouse to have to sacrifice their established quality of life in order to meet an IHT responsibility. This being admitted, it seems normal that the surviving spouse benefits from an increased allowance, his own assets being enlarged by the receipt of his spouse’s assets.
For a married couple with children, the above remains true. However, there is an additional non-taxable allowance of £175,000 available for those who leave their home to their children, known as the zero-rate residency band. Again, this is transferable between spouses, meaning a married couple with children can benefit from a tax-free allowance of up to £1million towards their combined estate. Again, there is clear logic to this exemption as many are very keen on leaving property to children and would not favor a child being forced to sell property to meet an IHT liability. .
Nevertheless, the direction of societal shifts poses important questions for the current IHT regime. Marriage is no longer the only way to build a common life with another, so should we recognize more the shared wealth that cohabitants or other people can enjoy? Indeed, one can also ask whether children are the only beneficiaries of patrimonial assets worthy of being protected by the IHT.
What can I do to mitigate my own liability?
The crux of the matter is that there are fewer tax breaks available for single people and for those without children. Nevertheless, there are many strategies available for those who believe they will be in this position for the long term and wish to mitigate their potential exposure to IHT. Examples might include large gifts to those with whom a person ultimately wishes to share their wealth when the time is right, or smaller, more regular gifts from surplus income on an ongoing basis. Bequests left to charity are exempt from IHT, and leaving a sufficiently large portion of an estate to charity will reduce the overall rate of IHT payable.
The appropriate strategy for each individual will, of course, depend on a plethora of considerations. Just like the modern family, there is no one-size-fits-all approach to tax planning. Shepherd and Wedderburn’s private wealth and tax team are well versed in helping clients identify and achieve their long-term goals, ensuring their estate is maximized for their loved ones, whoever they may be.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.