New solutions to cover inheritance tax liabilities
Andy Roberts, Technical Sales Manager
Monday 12 August 2019
As the nation’s wealth grows, so do the Government’s inheritance tax (IHT) receipts.
In the 2018-2019 tax year a record £5.4bn* was paid, an increase of 3.1% from the previous year - and this level of increase is forecast to continue:
With this trend comes an increasing need for effective IHT planning and this has led to more focus on how to reduce clients’ IHT liability over time - either by gifting away assets during their lifetime, or investments into IHT friendly schemes.
Covering the IHT liability on a gift
When assets over an individual’s available nil-rate band are passed to their beneficiaries on death, they are usually liable to 40% tax, but when they are gifted (to an individual or charity) during their lifetime they are free of IHT if the donor survives for seven years, subject to a reducing rate of tax in the meantime:
The protection solution to this is a ‘Gift Inter Vivos’ structure, which is easily constructible by way of five Level Term covers - for 3, 4, 5, 6 & 7 years - each for 20% of the initial IHT liability. For example, assuming no nil-rate band is available, if a gift is made of £150,000, the initial liability is £60,000 (40% of £150,000), and therefore each cover would be for £12,000 (20% of £60,000).
After year three a cover falls away each year to match the reducing liability. If the donor dies within seven years, the recipient will receive the proceeds from the policy to pay the tax. But what initial solution can you put in place for clients who intend to make gifts to their beneficiaries over time?
A new solution for couples
If the client is not married then a single-life Level Term policy is the solution to cover a liability that’s expected to be eroded by a certain age, but what if they are married or in a civil partnership? All providers have a Joint-Life Second Death (JLSD) option on their Whole of Life product, but would your clients want to pay for a comparatively expensive Whole of Life policy when they don’t intend to have a liability by a certain age?
This is why we have launched a more cost-effective solution for couples - a JLSD option on our Level Term policy. This cover is available up to age 87 at entry and can last all the way up to age 90 at expiry. We have even included a unique ‘carve-out’ option - each time one of the lives assured makes a gift they can effect new Gift Inter Vivos cover (as above), without any further medical underwriting, and reduce their JLSD Term sum assured accordingly.
Business Relief-qualifying investments
An increasingly popular way of reducing a client’s IHT liability is by way of investments which qualify for Business Relief (also known as Business Property Relief).
Shares in qualifying business (or funds which invest in such businesses) attract 100% Business Relief provided they have been held for at least 2 years at the time of death - after which they are exempt from any IHT liability. For example:
Investment in a
Death within 2 years
Death after 2 years
|Value at death||£200,000||£200,000|
|Inheritance tax liability (@ 40%)||£80,000||£0|
|Net value to estate||£120,000||£200,000|
If the investor dies within 2 years, the investment will remain subject to IHT, and therefore life cover is needed to cover that period of IHT liability. We’ve therefore also reduced the minimum term on our Level Term policy to 2 years so you can meet that need. If you advise on these investments then you may like to take a look at our Investment IHT liability insurance sales aid
Find out more
If you would like to know more about these, or any of AIG Life’s other Wealth Protection solutions, please call our Sales team on 0345 600 6820 or email: email@example.com