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Whole of Life Protection

As a tax on the estate of someone who has passed away, Inheritance Tax can cause great anxiety and stress to families and other beneficiaries of their estate, especially as HMRC requires payment of the bill within six months of the person’s death.

With a 40% tax liability on the value of estates above the £325,000 threshold (£650,000 if you include an unused spouse/civil partner threshold), Inheritance Tax can result in a significant tax bill. All told, in 2021/21 it raised £5.3bn for the Exchequer, close to the peak of £5.4bn in 2018/19.

Add the impact of rocketing property prices, which are likely to inflate the value of estates and the freezing of the tax-free allowances for Inheritance Tax until April 2026, and as the example below illustrates, Inheritance Tax has the potential to land those who survive you with a large tax bill.

If an individual leaves behind assets worth £1,000,000 subject to Inheritance Tax, their estate pays Inheritance Tax of £270,000. This is calculated by applying the 40% tax rate to the portion of the estate (£675,000) above their £325,000 ‘nil-rate band’ threshold.

However, if the person also utilises ‘the main residence nil-rate band’ by leaving the property via their will to a direct descendant the tax due is reduced to £200,000. This is calculated by applying the 40% Inheritance Tax rate to that portion of the value of the estate above the combined sum of their ‘nil-rate band’ threshold and their ‘main residence nil-rate band’. The latter allowance only applies where the value of an estate value is less than £2m.

Where someone is married or in a civil partnership an individual is able to take advantage of both their own ‘nil-rate band’ and ‘main residence nil rate band’ and any unused thresholds of their partner’s equating to a threshold of up to £1,000,000 before any tax charge is applied.

Landing your beneficiaries with a large IHT bill is not inevitable

Fortunately, by carefully planning ahead you may be able to save your beneficiaries the worry and expense of having to pay a large tax bill. One way would be through taking out a whole of life policy. Set up under a suitable trust, a whole of life policy can provide beneficiaries with the money required to pay an Inheritance Tax bill when it is due.

Not only can a whole of life policy set up under a suitable trust save beneficiaries the financial worries of meeting a significant tax bill within six months of your death, it can also help bypass probate, speeding up the whole process and reducing stress.

Rather than fixed term insurance, which expires on a set date, for example when a loan or mortgage is paid off, a whole life policy continues throughout you and your spouse’s/civil partner’s life, and pays out only on the death of any survivor.

Utilising trusts

To gain maximum benefit from a whole of life policy, you may put your policy into a suitable trust. This avoids the problem of the proceeds of the policy being paid into the estate on death, which increases the estate’s assets, and thus the Inheritance Tax liability.

Although a variety of trust arrangements can be used to mitigate against Inheritance Tax, the most common is a discretionary trust. Under the rules of this type of trust, the owner of the policy (the settlor) is excluded, and as they do not benefit from the trust arrangements they should not incur any further Inheritance Tax.

The premiums for the cover will be treated as a gift, and as long as they don’t exceed the £3,000 yearly gift allowance should be free from Inheritance Tax.

Gifts of more than £3,000 a year are more complicated. Speak to your Courtiers Adviser for more details of Potentially Exempt Transfers (PETS) and making regular gifts out of income.

Referring back to the above example of a £200,000 Inheritance Tax liability, a guaranteed whole of life policy for £200,000 under trust will provide the money to pay the tax bill in the event of your death.

Inheritance Tax can present the beneficiaries of an estate with an unexpected surprise. However, alongside making full use of your and your spouse’s allowances, gifting to family and friends, whole of life policies can be a valuable tool in Inheritance Tax planning.

In order to provide the best whole of life protection for you and your family, Courtiers advisers have access to whole of life protection products from across the whole market. If you would like to know more, please speak to your Courtiers Adviser or contact us.

Whole of Life Policy – Key Points

The policy lasts as long as you live and pays out in the event of your death (or the death of the surviving spouse or civil partner).

Premiums payable up to death of second person. You can choose to guarantee the premiums or to start the policy premiums at a lower rate, increasing over the life of the policy. (These premiums are known as ‘reviewable premiums’).

The older a person is and the more they suffer from ill health the higher the premiums are likely to be.

To cover the expected growth in the value of your assets during the period up to your death, you can take out a policy for more than the Inheritance Tax liability you originally anticipated.

You should place the policy under trust. Otherwise the sum assured will fall into the estate and itself be liable for Inheritance Tax.

Disclaimer

Tax treatment depends on individual circumstances and may be subject to change in future.

The views expressed by Courtiers in this summary are reached from our own research. Courtiers cannot accept responsibility for any decisions taken as a result of reading this article. Investors are recommended to take independent professional advice before effecting transactions and the prices of stocks, shares and funds, and the income from them can fall. Past performance is not a guide to future returns.

We do not endorse or accept responsibility for website content on any websites other than those operated by Courtiers, which may be accessible via links in this article.

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