Pay £18,930 now to save £1m in inheritance tax later

As the Government reaps recordbreaking amounts of inheritance tax, inventive families are using unusual insurance policies to save thousands of pounds that would otherwise be paid in death duties, writes Charlotte Gifford.

Everyone can pass on £ 325,000 before IHT is due at 40pc (there is an extra allowance for family homes).

One way to reduce IHT bills is to give away lump sums during your lifetime. Up to £3,000 can be given away tax free, but above that figure tax is due on a sliding scale until it falls to zero after seven years.

Under the “seven-year rule”, gifts made three years before death attract the full 40pc rate. Then taper relief applies on a sliding scale, dropping by 8 percentage points each year until the sevenyear mark is passed.

However, there is growing interest in gift insurance policies – or “gift inter vivos” plans – that pay out a lump sum to meet the IHT due if the donor dies within the seven-year window.

Rachel de Souza of the accountancy firm RSM said: “The insurance does not prevent IHT being due, but it effectively compensates for the value lost by having an IHT liability.”

If a healthy 70-year- old died within three years of giving away £2.5m, they would pay £1m in inheritance tax. However, if they had gift insurance it would meet the IHT bill and cost £18,930 in premiums (£ 6,310 a year), according to Risk Assured, an insurance broker. While using “whole- oflife” policies to offset death duties is relatively well known, gift insurance is less common. Currently Aegon and LV are the only insurers to offer the policy.

The younger the customer, the lower the premiums would be. Whereas a 70- year- old would pay £6,310 in the first year for £ 1m of cover, an 80-yearold would pay £ 27,921, according to Risk Assured.

Those taking out a gift insurance policy should be sure to place it in a trust, so the proceeds are not considered part of the estate, said the broker’s Mike Strutt.

Last year booming house prices and the continued freezing of allowances meant the Government collected £6.1bn in IHT, a record amount.