As more families realise they may be subject to inheritance tax (IHT), many are seeking strategies to prevent losing 40% of their estate to taxation
With the old solution of stuffing cash into a pension ruled out by new legislation, many people are turning to life insurance to shield their families from future inheritance tax bills. The idea is the payout from the insurance policy will cover the cost of any future IHT bill after the policyholder dies.
From April 2027 unused pension funds will be included in IHT calculations and potentially be taxed up to 40%. The value of these pensions will push many families above the £325,000 IHT nil-rate band.
Could inheritance tax insurance’ provide a solution for your family, and are there any downsides?
Why insure against the inevitable?
Whole of life insurance, also known as life assurance, is a type of life insurance policy that provides lifelong coverage. Unlike term life insurance, it doesn’t have a fixed end date.
It pays out a lump sum to your beneficiaries whenever you die, as long as premiums are maintained.
So, you can be sure your family will be provided for when you are gone, but the benefits don’t end there. If you arrange your cover to be written in trust, it will be excluded from your estate. This means that your loved ones will be presented with a lump sum the taxman can’t touch, and which can be used to pay off any IHT liability.
If life insurance isn’t written into trust, it forms part of the estate. This means it simply adds to the 40% inheritance tax liability. If the cover is written in trust, the proceeds of the policy can be paid directly to beneficiaries, rather than to the estate. This means there is no IHT to pay on the payout.
Writing this sort of policy in trust is routine and will only require ticking a few boxes on the application form when you arrange it.
The problem is that death is inevitable, and so is the payout. This means whole of life policies can be expensive, because the insurer has to make a substantial charge for the level of cover you need.
Cutting the cost of the cover you want
Having a clear plan for disposing of your estate can show you the sum required.
You need to get the appropriate value insured and ensure the premium is as low as possible.
The problem is that like most insurance, whole of life cover becomes more expensive the older you start the policy – and many people wait too long.
If you start looking at whole of life policies once you are in your 70s and upwards the cost is extremely high. The cost of the level of cover you need may be unaffordable.
Taking out a whole of life policy at the age 60 to cover the cost of a £300,000 inheritance tax bill might cost around £1,000 a month, or £12,000 a year.
Wait another 10 years and by the time you are 70 you may pay nearly £5,000 a month, or £60,000 a year.
But if you act early, when you are 50, that whole of life policy is a much more manageable £300 a month, or £4,800 a year.
It pays to make your succession arrangements early – and doubly so if those arrangements include insurance.
Should you take out life insurance to pay an IHT bill?
With the recent changes to the IHT rules, life insurance is becoming even more important as one of the few effective tools remaining for families to protect their estates. But you need to structure these policies correctly to help maximise their benefits and ensure the policy you choose gives the cover you need and which meets your objectives at the lowest premium.
For the help you need with insurance, and with planning how you will pass on your wealth, call us at Continuum. And remember, the sooner you make your arrangements, the less it could cost.
Why not call us today?
‘Inheritance tax insurance’ enquiries are soaring – but is it worth it? | MoneyWeek
What is inheritance tax? | MoneyWeek
This article is intended for general guidance only and is based on the opinion of Continuum it does not constitute financial advice. Individual circumstances vary, and you should consider seeking advice from a regulated financial adviser before making any decisions about your pension or retirement planning.
The Financial Conduct Authority does not regulate taxation and trust advice or will writing.
You should refer to policy documentation and seek advice in order to understand what the policy does and does not cover before making an application.
