Rising property prices have seen more and more family estates having to pay inheritance tax (IHT) – and left them facing larger IHT bills than ever before. In fact, in the year ending May 2017, HMRC collected a record GBP5.1bn1 in IHT receipts.
While it's possible to reduce IHT during your lifetime by making financial gifts to your family, it can be tough to strike the right balance between gifting enough money to reduce the IHT liability and retaining sufficient funds to live out your remaining years in comfort.
A potential solution to this dilemma is purchasing a life assurance policy that will pay out a lump sum, which your family can then put towards paying the IHT bill.
What type of assurance?
The most appropriate type of policy to help meet a predicted IHT liability is a guaranteed whole-of-life assurance. As the name suggests, this type of policy doesn't run for a particular term; it simply pays out when the holder passes away.
What's more, guaranteed whole-of-life assurance isn't subject to any reviews and is not linked to the performance of any fund(s). This means that your beneficiaries will receive a guaranteed lump sum. While that might sound like marketing speak, what it translates to is peace of mind for you and your family.
There are other, often cheaper, forms of life assurance, such as term assurance and investment-linked policies. However, these provide no guarantees. If the term policy expires, so does the life cover. If the investments linked to the policy take a nose dive, so does the benefit. That said, any help paying an IHT bill will undoubtedly be welcome.
How much cover?
With the type of policy decided, the next step is determining what level of cover to purchase. This isn't an exact science, since it's difficult to know precisely what size the estate – and therefore the IHT liability – will be when the time comes. Nevertheless, your Relationship Manager can help you to calculate an indicative figure.
Whatever level of benefit you choose, it's vital the policy itself is held in a suitable trust from the outset. If not, the benefit will be liable for IHT. Regularly reviewing the policy, rather than just filing it in the bottom drawer, is also important.
Every three to five years, check whether the size of your estate has changed substantially – perhaps it has grown or you have given some of it away in that time. If there is a significant change, your level of cover may need to be adjusted accordingly.
What's the point?
The purpose of life assurance is not to put a price on a human life or to make an IHT liability disappear – it's about planning for the future and making life easier for your family when the inevitable happens. After all, no one wants to make painful decisions about selling assets to settle a tax bill, especially at an already stressful time.
To find out more about how life assurance could help your family cover the cost of inheritance tax, get in touch with your Relationship Manager.
1 British families paid a record GBP5bn in inheritance tax – The Telegraph, 2017