The revenue generated by the government from Inheritance Tax (IHT) is climbing, and stagnant allowances suggest it will continue to grow. Should your family be liable for IHT upon your death, life insurance might be an effective solution to manage the costs.
According to MoneyAge, the amount collected through IHT hit a record £7.5 billion in 2023/24.
An IHT bill could reduce the wealth you leave to your loved ones and cause significant stress. Any part of your estate that surpasses the set thresholds may be subject to a 40% IHT rate, potentially forcing your family to decide which assets to sell to pay the tax.
Determining if your estate will owe IHT can help you plan ahead to alleviate the financial burden on your family.
If the value of your estate exceeds £325,000, it could be liable for Inheritance Tax
IHT is applicable if the value of your estate surpasses certain thresholds at the time of your death.
For the 2024/25 tax year, the nil-rate band is set at £325,000, meaning no IHT is due if your total assets fall below this amount. Additionally, many estates can benefit from the residence nil-rate band, which is £175,000 in 2024/25, provided your main residence is inherited by direct descendants.
Therefore, you can typically transfer up to £500,000 before IHT becomes a concern. If you are planning with your spouse or civil partner, you can also transfer any unused allowances to them.
It’s important to note that the nil-rate band and the residence nil-rate band are frozen until 2028, which is expected to result in more estates becoming subject to IHT.
Indeed, the Institute for Fiscal Studies estimates that by 2032/33, 1 in 8 people will have IHT due either on their death or that of their partner. As a result, IHT revenues are predicted to double over the next decade.
Life insurance can provide a useful way to pay Inheritance Tax
Life insurance won’t decrease the IHT owed by your estate, but it can offer a simple way for your loved ones to cover the tax.
By taking out whole of life insurance, you agree to pay regular premiums to keep the coverage active. Upon your death, your beneficiaries will receive a lump sum, which they can use to pay the IHT. This approach could prevent your family from having to liquidate assets or divide the estate to settle the tax bill.
The cost of premiums will vary based on several factors, such as your age, health, and lifestyle. Additionally, the amount of coverage you need will influence the premium cost.
You can choose a coverage level that fits your needs, making it essential to understand the potential size of an IHT bill.
A good starting point is to evaluate the current value of your estate, which includes all your assets such as property, investments, and personal belongings.
Next, consider how the value of each asset might change over time. For instance, property values are likely to increase.
If you’re not relying on savings and investments to supplement your retirement income, they could appreciate in value over time. Conversely, some assets, like your pension, might be depleted during your lifetime.
This makes it challenging to estimate the potential size of an IHT bill. A financial planner can assist you in understanding how the value of your estate may fluctuate under various scenarios, helping you select the appropriate level of life insurance coverage.
You may want to place life insurance in a trust if it’s for Inheritance Tax purposes
If you’re thinking about using life insurance to help your family cover a potential inheritance tax (IHT) bill, it’s wise to put the life insurance in a trust.
By placing it in a trust, it remains separate from your estate and won’t be factored in when calculating the IHT owed. Without this step, the payout from the life insurance could be included in your estate, resulting in a higher IHT bill.
You can establish a trust on your own, but they can be complicated and come in various forms. Consulting a legal professional can help minimize errors and ensure that the trust you create meets your needs.
Get in touch to talk about your estate plan
Life insurance can offer your loved ones an easy method to cover an IHT bill, but other strategies may also be available. As part of an estate plan, a financial planner would assess your situation and objectives to determine how to transfer assets efficiently, including measures that could lower an IHT bill.
Please get in touch with us to arrange a meeting to talk about your estate.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate estate planning.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
Recent Comments