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Making property simple: Consider insurance to fund Inheritance Tax bills?

Property forms a significant part of nearly everyone’s estate and for most it is considered their main asset. Against the backdrop of the nil-rate band on death remaining stubbornly low, and frozen until 5 April 2021, the tax take faced can be significant especially with prices continuing to rise faster than inflation. Given the illiquid nature of property, estate planning options can be expensive and complicated and this is even more so when individuals wish to pass on their assets to the next generation to minimise tax leakage. Here we look at two solutions for funding an Inheritance Tax (IHT) bill.

Life cover on death

Many individuals are keen to simplify their financial affairs but also to crucially keep control. A simple solution has always been to insure the amount of IHT on death and establish a life policy under trust which funds the liability. In the main, these have always been whole of life policies which reflect the unknown date of death and are a straight longevity bet with the insurer.

The attractiveness of life cover is that is has always been a relatively straight forward and easy to understand option, although traditional whole of life plans are generally expensive. The additional benefit, for those with material unrealised capital gains, is that they do not need to crystallise an expensive Capital Gains Tax (CGT) bill in gifting the assets during lifetime to their heirs but they then inherit on death with an uplift to market value to be able to sell CGT free.

Another solution from a cost perspective is therefore to use a shorter term life policy which initially provides the cover and allows time for the individual to plan how they may structure their long term assets. Using a combination of renewable and convertible term assurance often provides the best of both worlds while providing the required cover and offering longer term options without the need to pay significant monthly or annual premiums.

Life cover on lifetime gifts

For those who wish to make lifetime gifts, life cover can be a useful planning option here too.  Gifts will normally be considered as potentially exempt transfers and will only remain outside of an estate if the donor survives them by seven years. If death occurs within the seven year period the tax is tapered after the third year.

Using a gift inter-vivos life policy can protect any tax amount that will fall due if the donor does not survive the full seven years. The policy offers a reducing sum assured to match the seven year taper. It also gives certainty on the length of time the cover is needed for – seven years, so the cost can be accurately quantified.

In our experience we have found there are limited insurers continuing to offer this type of cover and therefore it can often be more expensive than establishing a range of short term policies ranging from three to seven years which reflect the actual tax in each year of the potentially exempt transfer.

If you would like to discuss IHT planning, please get in touch.



Date: 17th June, 2016
Author: Iain Muffitt - Financial Adviser


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