Using a Life Cover Insurance Plan Written in Trust to Meet an Inheritance Tax (IHT) Liability
Introduction
Inheritance Tax (IHT) can be tricky to understand, but its impact can mean less money ends up in the pockets of your loved ones. This is even more so the case as pensions will form part of your estate from 2027. A solution could be to write a Life Cover Insurance Plan into Trust.
Tax allowances such as the residence nil-rate band (RNRB) begin to fall away for estates valued in excess of £2 million. In the case of the RNRB, this is tapered by £1 for every £2 an estate exceeds £2 million.
What is a Life Cover Insurance Plan?
Life insurance offers a tax-exempt payout to a chosen beneficiary upon your death.
This insurance comes in two forms; term assurance and whole of life assurance.
Term assurance covers you for a set duration. It is often chosen to safeguard against debts that will diminish or conclude over time, like a mortgage repayment, or to ensure there is a fund available for specific future expenses, such as your children’s education costs.
Whole of life assurance, on the other hand, guarantees a payout at the time of death, as long as the premiums have been consistently paid throughout the policy’s term.
Whole of life policies are generally aimed at addressing financial responsibilities that will arise at your death, regardless of its timing, like covering an inheritance tax bill or enhancing the inheritance you leave behind. These plans are suitable when the need for coverage is indefinite or unclear.
How can a Life Cover Insurance Plan help pay towards an Inheritance Tax (IHT) bill?
Over and above gifting sufficient assets to reduce your gross estate value to within £2 million, if you have excess income during your retirement, it might make sense to consider a Life Cover Insurance Plan written in trust, to meet the eventual IHT liability, which could be as high as £400,000 on an estate valued at £2 million.
It is important that the Life Cover Insurance Plan is written into Trust, and that the premiums are paid using excess income, rather than from assets – otherwise, the premiums paid could be treated as a chargeable lifetime transfer (CLT).
Note that probate is required to release estate assets, and IHT needs to be paid before probate is granted. Therefore, an estate’s assets cannot be directly used to meet IHT liability, and an alternative solution such as life cover in trust provides the funds required.
How much might a Life Cover Insurance Plan cost?
As of February 2024, a guaranteed whole of life joint plan with a sum assured of £400,000 would cost £6,520 per annum, assuming a 65-year-old male non-smoker and 65-year-old female non-smoker insured through Legal & General, and not including ‘waiver of premium’ as an additional option. These figures are based on guaranteed premiums, meaning the provider cannot change the premium as you get older.
Guaranteed whole of life cover provides certainty; if the premiums are paid until death, then the sum assured will pay out. To put the figures in perspective, a 65 year old woman has a life expectancy of 24 years. By the time she is 89, she would have paid around £156,000 in premiums, but the payout from the plan would be £400,000 on second death. If the woman lives to 100, she will have paid £228,000 in premiums, and the payout from the plan would still be £400,000 on second death.
The value of financial advice and Inheritance Tax (IHT) planning
IHT is a highly complex area and very few people know every rule, exemption and allowance, or how to use them.
As your assets increase or decrease in value, your IHT liability will change and regular reviews of your financial position will therefore be important. It’s always a good idea to get in touch with a financial adviser whenever you buy or sell property too, or if you’re thinking of doing so. They can help make sure the choices you make will be tax-efficient for you – and those you leave behind.
Making confident decisions about Inheritance Tax planning while you’re still fit and healthy helps to create a better world for everyone you care about.
Appointing an expert wealth manager may enable you to capitalise on tax efficiencies such as these, mitigating paying unnecessary tax in your retirement and in the event of your death.
The levels and bases of taxation and reliefs from taxation can change at any time.
Tax relief is generally dependent on individual circumstances.