‘It would be IHT free!’ The ‘great way’ to support family and reduce Inheritance Tax bills

Women in particular appear to be more susceptible to being hit with large Inheritance Tax bills. More than half (53 percent) of women are planning on leaving an inheritance, but lack of financial planning means many are at risk of paying too much inheritance tax or not having their wishes fulfilled.

Research by Fidelity International showed that out of those planning on leaving an inheritance, more than half (55 percent) of women have made no financial planning compared to 41 percent of men. Women are also more likely to not understand the rules around inheritance tax compared to men, at 37 percent compared to 25 percent.

This is despite women holding more wealth than men when it comes to estates that are liable for tax, which is likely due to the fact they tend to have a higher life expectancy. Figures from the Office for National Statistics show that female-owned estates that are liable for tax have an overall net capital value of £13.6 billion, while male-owned estates have an overall net capital value of £12.3 billion.

The result is that female-owned estates are liable for £430 million more in inheritance tax than male-owned estates (£2.53 billion vs. £2.1 billion).

Fidelity International have provided their top tips for women planning on leaving an inheritance:

Create a will

“Fidelity’s research shows that only half (50 percent) of women aged 55-64 have created a will. This means if they pass away, they risk the things that matter most to them being distributed in a way that isn’t in-line with their wishes. This doesn’t just apply to money either – family heirlooms or businesses could also be passed on to someone you aren’t comfortable with if you haven’t created a will or if it’s not up to date.”

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Gifting while still alive

“Each tax year you are able to gift up to £3,000 in total without being subjected to inheritance tax (IHT). You can gift this amount to as many people as you like, but it cannot exceed this amount.

“On top of this, you can also make wedding or civil ceremony gifts of up to £1,000 per person (increased to £2,500 for a grandchild and £5,000 for a child) and give as many gifts of up to £250 per person as you want, as long as you haven’t already used any other allowance on them. Gifts to spouses or civil partners, charities, museums, universities, some political parties, and sports clubs are also not subject to IHT.”

Contribute towards pensions or savings

“Another great way to support your family now while being IHT efficient is to contribute towards their pensions or savings accounts, such as a Stocks and Shares ISA. As long as this comes from your income, is a regular amount and doesn’t affect your normal standard of living, it would be classed as a ‘gift out of normal expenditure’ so would be IHT free. Contributions to pensions also attract tax relief, meaning your money will go further while helping set your family up for the future.”

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Investing for children

“If you would like to use your wealth to help your children or grandchildren, then it may be worth gifting up to the tax-free allowance of £9,000 per annum to a Junior ISA or £3,600 per annum to a Junior SIPP. Both are tax efficient ways to save and can be contributed to regularly.

“Larger amounts can be gifted by investing in a bare trust, which cannot be accessed until the child or grandchild reaches 18. Gifting to children’s investments is exempt from IHT as long as you do not pass away for seven years after making the gift.

“If you do pass away during this period and you have already utilised your nil rate band by making prior gifts, IHT may be payable on a sliding scale. This is why it’s important to keep a record of the amount and timing of gifts.”

Maximising your pensions

“Pensions can be a great way to preserve your assets, as they are generally exempt from IHT. If you can, draw income from non-pension assets before taking income from your pension. You can also maximise your income and capital gains tax savings by taking income from ISAs, investment bonds (up to five percent per annum), or by encashing capital gains from investment funds up to £12,300 per year per person.

“Don’t forget to also consider your spouse’s source of income so that you make maximum use of both tax allowances and reliefs – in some cases it may be worth putting certain assets in each other’s names.”

Dawn Mealing, Head of Advice Policy and Development at Fidelity International, commented on the findings. She said: “Out of those who are liable to pay inheritance tax, women’s net estates are worth £1.3 billion more than men. Yet, almost half have done no financial planning to make sure this wealth is gifted the way they want – something isn’t adding up.

“In general, women tend to have larger inheritances as they live longer, and therefore are more likely to inherit wealth from their partner. This leaves them facing even bigger decisions as it means they are responsible for both theirs and their partner’s wishes, and without help from an adviser they could find themselves lost.”

Fidelity International believe that by not having any financial plans in place, women are not just more at risk of paying too much inheritance tax, but also not having their wishes around how their wealth is passed on fulfilled.

An example of this is the difference between how women and men plan on distributing their wealth. Two-thirds (64 percent) of women plan on giving their money to adult children, compared to just 56 percent of men, while men are twice as likely to gift money to their parents than women (18 percent vs. nine percent).

Women appear to also be less likely to make plans in the short-term in order to reduce their tax liability in the future. Despite one in five (19 percent) planning on gifting part of their wealth to family or friends in the next five years, 53 percent are unaware of the rules around giving money away at least seven years in advance in order to avoid paying inheritance tax on certain amounts.

Ms Mealing continued: “Inheritance tax is a subject that often confuses people, with various rules around exemptions, gifting assets, and the amount you should pay. However, from an emotional perspective, it also means that by not seeking advice you may not be able to give as much to those that matter most to you, or in the way you want.

“By discussing your plans with a financial adviser earlier on, you could avoid paying too much tax and be safe in the knowledge that your estate will be handled as per your wishes.”

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