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There are many different approaches to Inheritance Tax Planning and when advising clients Graham Doubtfire, Private Client Tax Partner, looks at blending different solutions, which can include Gifting (the 7 year rule is familiar to many), securing tax reliefs (Business Property Relief and Agricultural Property Relief is a focus for many of our clients) but an option which is often not given appropriate consideration is the use of Insurance.
There is no right time to think about Inheritance Tax Planning, but it’s an important topic and one that I have recently spoken about with a new client.
The married couple in their late 50s / early 60s came to speak to me about Inheritance Tax planning following the death of a close family member. Having inherited some wealth and both still actively working they had decided to buy a holiday home. They felt this was the right thing to do for them in their current stage of life, and were not yet prepared to give away assets as they still didn’t know what their future might look like. When I looked at their assets, taking into account their main home, holiday home and some cash savings it was clear that with the current Inheritance Tax Exemptions their children, the beneficiaries of their estate, would suffer a substantial Inheritance Tax liability if they were both to pass away.
I advised them that at their current stage of life, and looking at the assets they own, the Inheritance Tax liability could not be avoided. However, a tool that is often overlooked was the solution for them. By calculating what the Inheritance Tax liability would be and seeking advice about whole of life insurance the couple were able to use a modest amount of their income to purchase a Whole of Life Insurance Policy that would provide a sum of money to pay the Inheritance Tax.
To obtain the maximum benefit from this insurance policy it was written in Trust. This means that Probate is not required to access the proceeds from the insurance policy and the proceeds are also outside of their estate. Making sure that the policy is in Trust is important and is something that can often be forgotten about, but not doing so can be a costly mistake as 40% of the proceeds from the policy become payable to HMRC if this step is not made.
There are instances where clients hold a whole of life policy, and pay the premiums which can increase over time, until death. For this couple they had piece of mind, and there was a plan, such that when it was no longer appropriate to retain the holiday home, or when they decided to downsize and release some capital that is tied up in their main home, some of the traditional gifting and investing approaches to Inheritance Tax Planning will be utilised and the whole of life policy (and the costs associated with it) can then be reduced or eliminated completely. This approach meant the couple were secure in the knowledge that Inheritance Tax would not impact on the passing of wealth to their children on their deaths, whilst allowing them the flexibility to adapt to changes in their lifestyle or taxation should the need arise.
If you are wanting to explore your Inheritance Tax position and start planning for the future now, reach out to Graham or one of our tax team by emailing hello@scruttonbland.co.uk or calling 0330 058 6559.
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