Minimize the tax burden of estates
This practitioner examines the knowledge gap between women and men regarding IHT; and what actions, as they become the primary owners of wealth, should women take.
Recent studies show that women are likely to pay more estate taxes than men, largely due to a lack of financial and estate planning. A British survey conducted by Opinium found that 37% of women said they did not understand the IHT rules, compared to 25% of men. Yet women now hold more wealth than men, says Helen Barnett, senior partner at Wedlake Bell law firm. Figures from the Office for National Statistics confirm that taxable estates owned by women have a net capital value of Â£ 13.6 billion, compared to Â£ 12.3 billion for men. In this guest article, Barnett examines what holds women back and what can be done to improve their wealth planning prospects. We welcome outside contributions, where the usual editorial disclaimers apply. Email your comments to [email protected] and [email protected]
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 spousal exemption applies once the first spouse died. But that ignores the apparent knowledge gap between men and women. The Opinium study, mentioned above, found that around 19% of women surveyed planned to donate part of their wealth to family or friends over the next five years. But just over half were unaware of the requirement to survive seven years from the date of donation in order to avoid paying the IHT. And among women who were considering leaving an inheritance for their family or loved ones, 55% said they had not made any financial plans, compared to 41% of men.
True, among the older generations it is still common for men to control the finances of the family, having been educated in the field of family finances by their own fathers. As a result, women of these generations may feel insecure about making decisions about money in general or IHT planning in particular if they outlive their husbands. As women tend to live longer than men, their priorities may also be more focused on ensuring that their assets last a lifetime, rather than reducing taxes.
There is also arguably still an under-representation of women in the world of financial planning. With financial planning and IHT being the preserve of men for so long, many women may not be sure to seek advice. Organizations like the WealthiHer Network have been created to try to solve this problem and empower women to make their own financial choices in a way that meets their needs.
Fortunately, the world is changing; women of the current generation are more financially independent, and financial and legal advisers are increasingly careful to tailor their advice to the needs of women, with less jargon and more focus on what wealth means for women .
So how can women take control of their estate planning in a tax efficient manner?
There are different options available, depending on the level of wealth available, and each person should ensure that their long-term needs are met before considering donating assets or otherwise taking them out of the network. IHT.
Use of exemptions and exemptions relating to donations
There are various reliefs and exemptions, including:
* Annual allowance of Â£ 3,000 – each individual can give up to Â£ 3,000 per year without IHT.
* Small gift allowance – in addition to the annual allowance of Â£ 3,000, up to Â£ 250 per year can be given to as many people as you want.
* Marriage / civil partnership gifts – up to Â£ 1,000 per person can be given to anyone on the occasion of their marriage / civil partnership, up to Â£ 5,000 for a child or Â£ 2,500 for a grandchild.
* Exemption for charities – all donations to registered charities are exempt from the IHT.
* Normal non-income spending – if someone has more income than they need to maintain their standard of living, they can offer any excess income (like excess salary or income from an investment portfolio) without IHT. It is a good idea to take advice before using this relief; HMRC will want to see detailed records to ensure that the income offered was truly in excess of the individual’s needs.
* All funds spent to support a dependent child (i.e. a child under the age of 18 or a child who is still in full-time education) will be exempt from IHT.
Make pure and simple gifts
An individual can give any amount of money to another person; if they survive seven years from the date of donation, the value of the donation will not be part of their estate for IHT purposes. If the donation consists of non-cash assets, the capital gains tax and (if the donation relates to an interest in a property) potentially also the property tax on stamp duties will need to be taken into account. .
If a person likes the idea of ââretaining some control over the funds they offer, they may consider placing the money in a trust, of which they could be a trustee. It is possible to put up to Â£ 325,000 in trust every seven years without the IHT becoming payable for at least the first 10 years of the trust. If more than Â£ 325,000 is transferred to a trust, an immediate fee will be charged to IHT at the 20% lifetime rate, unless other reliefs such as relief for commercial property or relief for properties agricultural products do not apply to assets transferred into the trust. It is also important to consider the CGT implications of transferring assets other than cash into a trust.
Maximize pension contributions
Pensions are generally exempt from the IHT, and if pension contributions are taken from income, those contributions will be considered ânormal expenditure on incomeâ, so it makes sense to put excess income into one’s pension, while taking into account the lifetime contribution limits.
There are other options available, depending on the person’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 they can provide for their loved ones in the way they want and in the most tax-efficient way possible.