How life in­surance can ease death tax bills

The Daily Telegraph - Your Money - - YOUR MONEY -

Fam­i­lies paid nearly £5bn in­her­i­tance tax last year. Life in­surance may help you fight back, re­ports Sam Brod­beck

As the taxman’s haul from in­her­i­tance tax reaches record highs, fam­i­lies are us­ing in­creas­ingly in­ven­tive ways to limit death du­ties. High house prices and buoy­ant stock mar­kets pushed the amount that HMRC col­lected from in­her­i­tance tax to £4.8bn last year. Politi­cians’ de­ci­sion to freeze the £325,000 per per­son tax-free al­lowance since 2009, although a new al­lowance for fam­ily homes has re­cently been in­tro­duced, also con­trib­uted to the rise.

One way to guard against leaving your fam­ily with a large tax bill is to buy a life in­surance pol­icy, a tac­tic in­creas­ingly used by fi­nan­cial ad­vis­ers when they help wealthy clients to cut their li­a­bil­ity.

These poli­cies can ei­ther be “term”, typ­i­cally cov­er­ing a pe­riod of five or 10 years, or “whole of life”, mean­ing that they are ac­tive un­til death.

In ex­change for a monthly pre­mium, cal­cu­lated by in­sur­ers ac­cord­ing to your age and health, a lump sum is paid on your death. Pre­mi­ums are ei­ther vari­able or guar­an­teed. In the for­mer case pre­mi­ums can be raised by in­sur­ers and can quickly be­come un­af­ford­able, leaving policyholders thou­sands of pounds poorer and with­out any cover at all.

Guar­an­teed pre­mi­ums start at a higher rate but give cer­tainty over fu­ture costs. “These poli­cies are great as long as you keep pay­ing the pre­mi­ums,” said Ed Fairey of Ed Fairey As­so­ciates, a fi­nan­cial ad­vice firm.

“As long as the pol­icy is ‘ in trust’ the sum as­sured will go to the ben­e­fi­cia­ries and will not be sub­ject to in­her­i­tance tax. In ef­fect it’s a longterm sav­ings pol­icy for the kids. It also pro­vides cash to pay any in­her­i­tance tax rather than force a sale of the fam­ily home or any other as­set.”

Any in­her­i­tance tax due has to be paid be­fore a “grant of pro­bate” can be is­sued and in­her­i­tors of an es­tate re­ceive their share. In some cases fam­i­lies are forced to cover the bills out of their own pock­ets or take out short-term loans to pay the tax.

Term or whole of life plans set up to pay into a trust do not form part of the de­ceased’s es­tate and are im­me­di­ately avail­able to the named ben­e­fi­cia­ries of the trust, avoid­ing these dif­fi­cul­ties.

Let’s imag­ine that af­ter the con­ven­tional and new “fam­ily home” al­lowances were used an es­tate was left with £500,000 li­able to in­her­i­tance tax. That would mean a tax bill of £200,000. It would cost a 65-year-old male non-smoker £432 a month to en­sure that a £200,000 lump sum was paid on his death. This pre­mium, from AIG, is the best rate on the mar­ket, ac­cord­ing to Fairey As­so­ciates.

If he died 20 years later (as is sug­gested by of­fi­cial mor­tal­ity sta­tis­tics) he would have paid out £103,745, just over half of the as­sured sum, in pre­mi­ums.

Prices rocket to in­sure older peo­ple be­cause the chance of them dy­ing soon is far greater. A non-smok­ing 80-year-old man would have to pay AIG £1,085 a month for the same cover. At that rate he would have to live un­til the age of 96 to have paid more than £200,000 in pre­mi­ums.

As un­used in­her­i­tance tax al­lowances can be passed between spouses, ad­vis­ers rec­om­mend that cou­ples buy a joint whole of life pol­icy ar­ranged to pay out only on the sec­ond death.

For a non-smok­ing cou­ple where the man is 70 and the woman 65, the best rate to en­sure that £200,000 is paid out is £330 a month from Zurich.

As with all long-term fi­nan­cial plan­ning there is the risk that your cir­cum­stances or the po­lit­i­cal land­scape change. Your as­sets may grow more quickly than you ex­pected, mean­ing that the even­tual pay­out is in­suf­fi­cient to meet the tax bill.

On the other hand, the Govern­ment could make the in­her­i­tance tax al­lowance more gen­er­ous. That could mean the lump sum far ex­ceeds the even­tual tax bill and us­ing in­come to pay monthly pre­mi­ums might seem fool­ish in ret­ro­spect. While the £325,000 in­her­i­tance tax free al­lowance has re­mained un­changed


Aged 65 (non-smoker) Aged 65 (smoker) Aged 80 (non-smoker) Aged 80 (smoker) Cou­ple, aged 65 & 60 Cou­ple, aged 70 & 65 for eight years, a new ad­di­tional al­lowance came into ef­fect in April this year.

The “main res­i­dence nil-rate band” gives each per­son £100,000 on top of the usual al­lowance in re­spect of their home. By 2020-21 it will rise to £175,000, mean­ing a cou­ple will be able to pass on £1m tax free.

In Charles Dick­ens’s novel fam­ily mem­bers bat­tle for an old man’s in­her­i­tance

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