A classically simple way to save Inheritance Tax

Aug 2, 2018 | Tony Byrne's View


There is literally a plethora of easy ways to save Inheritance Tax which remains to this day largely a voluntary tax. We have clients’ with multi-million pound estates who have no Inheritance Tax to pay when they die due to the advice we have given them over the years!

I recently advised a new client on a few simple ways to save Inheritance Tax on her estate. Let’s call her Joan which isn’t of course her real name. She is aged 72 and widowed. She is in good health both mentally and physically and is a fit person.

We produced an Inheritance Tax Planning Report for her recently. We did not pack it out with every possible solution under the sun because she didn’t want it to to be over-complicated. We largely discounted trusts because they are over-complicated, expensive and tax inefficient due to changes in legislation in recent years. So if you have trusts in place, especially so-called pilot trusts, you need an estate planning review now.

We gave her some simple solutions involving the payment of lump sums mainly involving investments into 100% business relief qualifying companies. Such investments become free of Inheritance Tax after 2 years!

However, the primary IHT solution was by recommending an insurance policy to pay the Inheritance Tax. So how might that work I hear you ask?

Well the solution for Joan was to set up a whole of life policy written into trust for the benefit of her adult children beneficiaries. When Joan passes away the proceeds of the policy are paid into trust meaning they do not form part of her estate for Inheritance Tax purposes. The children then use the funds to pay the Inheritance Tax which then enables probate to be granted. Once probate is obtained the estate may be distributed to her beneficiaries.

In addition to this IHT saving there is the IHT saving on the premiums themselves. You see the premiums are classed as gifts or Potentially Exempt Transfers, PETs, for Inheritance Tax purposes. What this means is that the premiums remain part of your estate for 7 years. However, there is an annual exemption of £3,000 for gifts per individual. So as long as the premiums are less than £3,000 per person (£6,000 for a couple) per annum then even the premiums escape Inheritance Tax.

So why a whole of life policy? A whole of life policy, as the name implies, lasts the whole of your life as long as you maintain the premiums. So in other words it is an insurance policy that guarantees to pay the sum assured one day.

There are essentially two types of whole of life policy – unit linked/reviewable or guaranteed. Historically only unit linked/reviewable policies were offered by insurance companies. Under these policies both the premiums and the sum assured are reviewed usually every 10 years until later in life when they are reviewed more regularly typically every 5 years. Such policies build a cash lump sum but such cash is highly unlikely to ever exceed the amount paid in premiums. So potentially such policies could be surrendered and a lump sum will usually be paid to the policyholder/s or to a trust. The problem with these policies is that they frequently result in an increase in premiums and/or a reduction in the sum assured on review dates. Unfortunately this can and does lead to disenchantment meaning that policies often get cancelled after unfavourable reviews.

Guaranteed whole of life policies on the other hand as the name implies offer guaranteed premiums for the life of the policy so there are no periodic reviews of premiums or the sum assured. Such policies do not acquire a surrender value as there is no investment element. They are in effect the same as term assurance policies but with no fixed term. As a consequence I recommended a
guaranteed whole of life policy to Joan. She agreed.

This type of simple Inheritance Tax planning has been practised for decades with the full approval of HMRC. It’s simple yet effective. If you haven’t got round to having a full review of your estate and your Inheritance Tax planning yet what is stopping you. Contact us now for a review. You know it makes sense.

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