Life Insurance Policies
There are a number of instances where life insurance policies can be very helpful in IHT planning. For instance term insurance can be an effective tool in order to protect against liabilities which may arise from a single large Potentially Exempt Transfer. It is also possible to have reducing cover term policies in order to match the level of cover with the tapering IHT liability and therefore minimise cost compared to level term cover throughout.
Term cover, when properly structured, can also be used to provide a window for wider IHT planning to be undertaken and become effective. By way of example, if an individual sold their privately owned trading business for cash (effectively swapping a BPR exempt asset for a chargeable asset), they may take a term policy for a period of perhaps five or ten years so that they have ample time to plan what they wish to do with the cash and also allow for new reliefs to become effective.
Whole of life policies can be effective for covering IHT liabilities arising in respect of assets which the individual has no intention of giving away before death. For example, a widow with a £1.5m home but with two nil rate bands and two residential nil rate bands may maintain whole of life cover for £200,000 so that the IHT liability which falls due on her £500,000 remaining estate is covered from the insurance policy rather than met from the residual estate.
Although the principles of using life assurance contracts to cover IHT liabilities appears straightforward, it is important that the policies are executed correctly in order to make them effective. Firstly, policies should generally be written in trust, usually with the nominated beneficiaries being those to whom the inheritance tax liability will arise (but not the deceased’s personal representatives). As the policy is written in trust for others, the benefits of the policy should not fall back into the deceased’s estate.
It is also important that the premiums are met from normal expenditure out of income (see earlier article) so that the payment of the premiums are not considered dispositions from the deceased’s estate.
Finally, care should be taken in respect of the beneficiaries of a life assurance contract. If Tom made his son, Phil, the beneficiary of his life policy, and Phil pre-deceased Tom, then on Phil’s death there will be a transfer of value in respect of the fair value of Tom’s life policy at that date.
Should you have any queries or questions in respect of the above, please reach out to your usual Arnold Hill & Co contact or call our mainline number 0207 306 9100.
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.