Protect your Legacy: Insuring against IHT 

Around 40,000 families will be hit with inheritance tax this year. Some will be for hundreds of thousands of pounds.

Inheritance tax is charged at 40% on everything you leave above the basic allowance of £325,000, although there is a concession for the family home. The main residence nil-rate band provides an extra tax-free allowance of £175,000, provided that the house is being left to a direct descendent. 

Your loved ones will have to calculate the tax owed and pay the liability within six months of the death, often before probate is complete and they have access to the money you’ve left behind. With a grant of probate currently taking up to 12 months, some families are being left without the proceeds from the sale to cover the bill.

This can be a financial burden on top of the pain of losing you, the nightmare of a huge bill to be paid through no fault of their own, with no access to the funds they need to pay it.

However, there can be a way for you to help them.

Insuring against the inevitable

It is possible to make life easier for your relatives by putting some money aside to pay the bill.

You can do this by setting up an insurance policy that will pay out when you die. Normally, this would just make matters worse. In some cases the payout from insurance policies you have would be included as part of your estate, meaning the final tax bill could end up even higher.

However, if you write the policy into a trust it will be outside your estate for tax purposes, which means there will be no tax to pay on it, and no wait until probate is granted to access the payout. Payment can be made when a death certificate is provided, giving the trustee the funds to cover the inheritance tax bill immediately.

What type of policy do you need?

There are several types of insurance cover, and getting the most suitable solution is vital.  You need a whole of life policy (insurance, rather than assurance). This is guaranteed to pay out when you die, unlike term cover which comes to an end at a certain age.

Consideration should be given to getting the most suitable whole of life policy. With reviewable whole of life policies, the premiums can increase as you get older, often to many times the original agreed. The most appropriate solution is probably a ‘guaranteed’ whole of life policy. These are more expensive at the outset, but the premiums are guaranteed not to increase, even if you live much longer than expected, which means that they should remain affordable.

Married couples should consider getting a joint life second death whole of life policy. Inheritance tax is usually only due on the second death because spouses can transfer assets between themselves tax-free.

Insurance for gifts

Gifting assets while you are still very much alive is another way of trying to avoid inheritance tax, but ‘giving while living’ has a big problem.

The taxman is keen to avoid ‘deathbed giving’. Unless you live for another 7 years after making a substantial gift, he will consider it to be part of your estate and claw it back from the recipients.

Again, the appropriate kind of insurance can help.

For outright gifts over the tax-free allowance, if you survive more than three years, the inheritance tax due tapers down.

If you gave away £100,000 more than the tax-free allowance, and died within three years, the inheritance tax bill would be £40,000. Die between years three and four the tax bill would be £32,000, in years four and five it would be £24,000, years five and six £16,000, years six and seven £8,000, and reducing to zero after seven years.

A temporary life insurance cover, known as a ‘gift inter vivos policy’ can be written to provide cover that reduces in line with the liability.

Getting some help

For help with finding insurance, and with other solutions to inheritance tax nightmares, you need expert help.

A call to us at Continuum can provide it.

Inheritance tax: latest thresholds for 2024/25 – MoneySavingExpert

Is life insurance considered part of an estate? (moneyexpert.com)

How your insurance could spare you from an inheritance tax nightmare (telegraph.co.uk)

The information contained in this article is based on the opinion of Continuum and our understanding of current HMRC tax rates and does not constitute advice on a suitable Inheritance tax or investment strategy, you should seek independent financial advice before embarking on any course of action.

The value of your investment can go down as well as up and you may not get back the full amount invested.

The Financial Conduct Authority does not regulate taxation and trust advice or will writing.

Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change

We recommend that you seek professional advice on personal taxation matters.

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