According to a recent study, female-owned estates are currently exposed to around £430m more in inheritance tax than male-owned estates due to greater wealth concentration in women overall.
This can be partially explained by the longer average lifespan of women, who are thus more likely to inherit wealth from spouses or other family members. However, women are also more likely to admit that they do not understand the IHT rules.
There are various estate planning steps that women (as well as men) with excess wealth should consider taking.
Firstly, spouses or civil partners should put in place wills to take advantage of the complete IHT exemption on most transfers between them.
Although this may only defer IHT until the survivor’s later death, when coupled with lifetime planning a will becomes a key safety net against IHT on premature deaths.
Without wills, estates pass under the intestacy rules and, if an individual leaves a surviving spouse and children, half of the estate over an initial £270,000 will pass to the children, potentially suffering IHT at 40 per cent.
A surviving spouse could pass wealth down to the next generation wholly free from IHT, provided the surviving spouse survives the gifts by seven years.To mitigate IHT on death, individuals may also consider lifetime giving.
Various exemptions limit the IHT exposure on lifetime gifts but, notwithstanding these, lifetime gifts can generally be made free from IHT if the donor survives the gifts by at least seven years.
Coupled with tax-efficient wills, this means a surviving spouse could pass wealth down to the next generation wholly free from IHT, provided the surviving spouse survives the gifts by seven years.
Trusts can be effective way of keeping assets outside an individual’s estate.
However, assets settled on trust suffer an immediate IHT charge at 20 per cent over the available nil rate band (currently £325,000), plus a further 20 per cent if the settlor dies within seven years.
To avoid these charges, funds can be added every seven years under this allowance to allow the nil rate band to refresh.
Alternatively, an individual could settle their surplus income each year under the “normal expenditure out of income” IHT exemption.
During a trust’s lifetime, its trustees suffer IHT at up to 6 per cent of the trust’s assets every 10 years and on capital distributions to beneficiaries.
However, the IHT exposure can be managed within each 10-year period and/or, in any event, one can make an actuarial calculation whether such periodic IHT charges represent better value than a one-off 40 per cent IHT charge on death.
If an individual does not wish to give away assets, they may consider investing in stocks and products that are IHT-efficient; for example, qualifying business property currently benefits from 100 per cent IHT relief.
For non-domiciled (or deemed domiciled) individuals, their non-UK assets are entirely outside the scope of IHT. ‘Non-doms’ in particular can therefore give away their non-UK assets highly tax-efficiently.
Of course, local tax consequences in other jurisdictions must also be considered in such circumstances.
In order to avoid falling through the cracks and suffering IHT unexpectedly, individuals should review their estate planning regularly and, in particular, after key life events such as births, deaths and marriages.
Financial health checks can be a highly effective way of improving fiscal literacy, and understanding the tax rules is the key first step to effective estate planning.
Aidan Grant is a senior associate in the trusts, tax and estate planning team at Collyer Bristow
