Things to consider before the new tax year
Author:
Andy Roberts, Technical Sales Manager
Wednesday 1 April 2020
It’s that time of year again when attentions are drawn to helping your clients maximise their available tax allowances and exemptions by 5th April and planning for whatever changes will take effect the day after.
I’ve picked out two things for you to consider that could have an impact on protection.
Use them or lose them
HMRC currently provides several inheritance tax (IHT) allowances for gifts made each year, without them being added to the donor’s estate (and therefore potentially taxable)1:
- Transfers between spouses / civil partners (if both are UK domiciled)
- £3,000 annual exemption
- Weddings - £5,000 for children, £2,500 for grandchildren, £1,000 for anyone else
- Small gifts of £250
- Normal expenditure out of income
- Payments to help with another person’s living costs, e.g. an elderly relative or a child under 18
- Gifts to charities / political parties
The cost of life insurance premiums is typically covered under the normal expenditure from income exemption, provided they’re paid out of an individual’s income (not capital) and that they leave them with enough income to maintain their normal standard of living.
Even when the premiums are funded from capital (such as the sale of shares or annual withdrawals from an investment bond), they can still fall under one of the other exemptions.
AIG recently developed a proposition called Intergenerational Protection, designed for people who want to pay for their family members’ protection policies, such as a parent paying for a child’s income protection or critical illness policy - and the premiums will usually be exempt.
However, proposals for IHT reform from the Office of Tax Simplification (OTS) and the All-Party Parliamentary Group for Inheritance & Intergenerational Fairness (APPGIIF) in the last 12 months have recommended replacing these exemptions with a single annual allowance.
For some, the new allowance may be higher than the current exemptions, since normal expenditure out of income differs depending on the wealth of the donor. Nevertheless, it may be prudent for your clients who want to pass their wealth to their family to take advantage of the exemptions on offer right now.
Potentially Exempt Transfers
Currently, an individual can typically give away £325,000 every seven years1 on top of the exemptions without any tax liability; this works out as £46,428.57 per year.
Therefore, it’s tax-effective wealth planning for your clients to gift as much as they can afford within their available nil rate band (NRB). As it stands, even gifts above their available NRB are usually only taxable if they die within seven years - this potential tax can be insured against.
For example, a person makes a gift of £500,000 and dies within seven years:
- Value of gift = £500,000
- Nil rate band = £325,000
- Taxable amount = £175,000
- Initial IHT liability = £70,000
The rate of IHT reduces by 20% between years three and seven1. As such, five level term covers, each equal to 20% of the initial liability (£70,000 ÷ 5 = £14,000), can be used to insure this liability. For example:
| YEAR | IHT RATE | IHT LIABILITY | LEVEL TERM | SUM ASSURED |
| 0 - 3 | 40% | £70,000 | 7 years | £14,000 |
| 4 | 32% | £56,000 | 6 years | £14,000 |
| 5 | 24% | £42,000 | 5 years | £14,000 |
| 6 | 16% | £28,000 | 4 years | £14,000 |
| 7 | 8% | £14,000 | 3 years | £14,000 |
From year three onwards, 20% of the total sum assured falls away to match the reducing IHT liability. The proposals from APPGIIF also recommend scrapping the NRB in its current form, which would mean that this cost-effective method of passing on wealth is lost. Again, it may be sensible for those who can afford it to take advantage of it whilst they can.
Read more about the specialist solutions we can offer your clients on our dedicated webpage, including Inheritance Tax and Legacy Gift Planning, business protection and Instant Portfolio Protection. You can also contact one of our experts on 0345 600 6829 or adviser@aiglife.co.uk.
Sources