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Luxury assets & Private Wealth & Tax & Estate Planning & UK trusts, tax and estate planning & Wills & Succession Planning
A recent study states that women have a greater exposure to inheritance tax (IHT) compared to men, approximately in the region of £430 million.
2 minute read
5 November 2021
Given that women on average live longer than men, it is more likely that women will inherit significant wealth from their spouses and other family members than their male counterparts. As a result, a recent study states that women have a greater exposure to inheritance tax (IHT) compared to men, approximately in the region of £430 million.
Therefore, with an increasing number of middle England estates likely to pay IHT on death, flexible and tax efficient estate planning has become more important than ever. In this article, we discuss some of the key estate planning tools available to women (and men):
The foundation of any tax efficient estate plan should include the preparation of a Will. For assets passing between spouses, taking advantage of the complete IHT exemption is imperative, albeit that this may only defer IHT until the survivor’s later death.
To obtain the required balance between flexibility and tax efficiency, it is possible to leave an estate to the surviving spouse on an interest in possession trust with an overriding power of appointment to advance capital to the named beneficiaries. This structure allows the estate to benefit from the available spouse exemption with the flexibility for the trustees to exercise their discretion and potentially make advances to the next generation IHT efficiently.
A word of caution, without a Will the intestacy rules do not necessarily provide for the deceased’s estate to pass in accordance with their wishes and to mitigate IHT.
The most effective form of IHT mitigation is lifetime giving. Broadly speaking, if the donor survives their gift by seven years the gift will be free of IHT. There are also various forms of exemptions to limit the IHT exposure such as gifts to spouses and charity, the annual gift exemption (currently £3,000), the small gifts allowance of £250, gifts on marriage and gifts out of an individual’s surplus income (known as the ‘normal expenditure out of income’ exemption).
Where an individual has survived their spouse and they were the principal beneficiary under the deceased’s Will, lifetime giving allows for the surviving spouse to pass family wealth to the next generation free of IHT.
If an individual is fortunate enough to own objects of pre-eminent national significance, there are tax efficient schemes available, namely the Acceptance in Lieu scheme (AIL) and the Cultural Gifts Scheme (CGS). These schemes were introduced to encourage giving in the arts and cultural sectors to institutions for the nation to enjoy.
The AIL scheme offers favourable IHT benefits for the estate, whilst the CGS allows for the donor to offset an element of the gift from their lifetime income tax and capital gains tax liabilities.
When considering the appropriateness of these schemes (i.e. to give during life or on death), it is advisable to analyse the best case scenario for each individual and quantifying their likely tax benefits.
Although the Finance Act 2006 introduced a new tax regime for trusts (known as the ‘relevant property regime’), they remain an effective way of keeping assets outside an individual’s estate and reducing exposure to IHT.
Although assets settled on trust over the available nil rate band (currently £325,000) are immediately chargeable to IHT at 20 percent, with a further 20 percent payable if the settlor dies within seven years, these charges can be mitigated with careful consideration.
Firstly, if the funds settled on trust are below the nil rate band it is possible to effectively create a new trust, or add to an existing trust, every seven years free of IHT. If the trust is then managed correctly, the trust could remain outside of the scope of the 10 year anniversary IHT charges. Furthermore, trusts created to hold qualifying business assets remain effective to mitigate IHT.
A qualifying disabled person’s trust also remain a useful tax efficient vehicle for making adequate provision for vulnerable beneficiaries given that they do not full within the scope of the relevant property regime.
If it is not appropriate for an individual to divest themself of assets during their lifetime, investing in stocks and products that that are IHT-efficient; for example, qualifying business property currently attracts relief of up to 100 percent from IHT. Where this is a possibility, independent financial advice should be sought.
Finally, it is worth mentioning the benefits available for non-domiciled individuals who will not be liable to IHT on their non-UK assets and are thus free to dispose of them free of UK IHT, albeit that local tax advice would be required.
The UK IHT net is far reaching, however, it is important to have a flexible estate plan to ensure that an individual and their executors are able to utilise the various available exemptions, reliefs and IHT mitigation techniques. Regularly reviewing an estate plan, particularly in light of key life events such as births, deaths and marriages, is a prerequisite for good financial health.
First published on eprivateclient. The original article is available here
5 November 2021
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