IHT Planning
By Ross Glanfield
Having spent a lifetime accumulating assets out of taxed income and paying tax on interest, dividends and capital gains, the final insult is surely a demand from HMRC for 40% of the value of your taxable estate at a time when your family least need it.
Currently less than 4% of estates pay IHT which is why changes to this tax are not likely to appear on a political agenda, but official figures show that Inheritance Tax (IHT) raised over £7.5Bn for HM Treasury in the 2023/24 tax year. The tax raise is forecast to rise to £9.7Bn by 2028/29 which means that more estates are being hauled into the IHT net.
The basics of IHT are relatively simple. Everyone has a nil rate band of £325,000 and those with estates of £2m or less can also qualify for the residence nil rate band (RNRB) of £175,000 (if the estate is above £2m the RNRB is reduced or lost). Estates valued over these allowances have the excess taxed at a flat rate of 40% (or 36% if at least 10% of the net estate is left to charity).
It’s worth noting that you can make use of certain annual exemptions, such as the £3,000 annual exemption and £250 small gifts exemption, to reduce your IHT liability. Additionally, if you make gifts within seven years of your death, taper relief may apply to reduce the IHT due.
A commonly overlooked method of IHT planning is to take out a life insurance policy and use the proceeds to pay the tax. There are three instances in which this can be effective:
In conjunction with a gift of more than the annual allowance: larger gifts become PETs (Potentially Exempt Transfers) or CLTs (Chargeable Lifetime Transfers) and these only fall outside an estate in their entirety after seven years have elapsed. In the meantime, gifts remain inside an estate on a decreasing basis. It is possible to take out a life assurance policy to mimic the tax liability on the gift and this is a relatively inexpensive way to ensure the entire gift remains with the beneficiary.
Future gifts – some clients would like to make gifts to children, and they have the capacity to do so. However, the potential beneficiaries are either too young or they are not ready to receive large lump sums. In this instance, it may be appropriate to take out a term assurance policy to cover the IHT liability of the future gifting schedule.
Whole of Life Insurance – as the name implies, this is an insurance contract that will pay out whenever death occurs. This type of policy can be appropriate where the estate is asset-rich and there is little scope for lifetime gifts. They can also ensure that the property does not have to be sold on death to cover the IHT liability. However, it is important to make sure that there is sufficient future income to cover the premiums.
If you own qualifying business assets or agricultural property, you may be eligible for Business Property Relief (BPR) or Agricultural Property Relief (APR), which can provide significant IHT relief on these assets.
The final part of IHT planning with life cover is that it is vital that any life policy is put into trust otherwise the proceeds will form part of the estate and themselves be subject to 40% tax. This would rather defeat the object of the exercise.
It’s important to regularly review your IHT planning strategies as your personal circumstances, assets, and tax rules may change over time, necessitating adjustments to your plan.
So, if you think you’ve paid enough tax during your lifetime and you would rather your estate is passed in full to your family rather than to HM Treasury or a charity, please get in contact. I can help you consider all your options and put a plan together.