Providing for Inheritance Tax (IHT) - Everyday Law Summer 2005

01 July 2005

IHT is payable at a flat rate of 40% on estates in excess of £275,000 on the death of the owners of the estate. Many feel that this is a particularly penal tax, as it taxes assets that have already been taxed throughout the owners’ lives. There are three ways of dealing with the tax; you can pay it, mitigate it, or you can provide for it.

If we assume that paying the tax is undesirable, then often a simple restructuring of your wills can help mitigate the tax. But this will often have a limited effect, particularly where much of the estate is made up of property or is valued above £550,000 (twice the personal allowance). The Inland Revenue has recently attacked a number of tax planning vehicles, leaving many in a quandary as to how best to plan to keep their estates intact. You may wish to consider using a suitable life policy to cover the portion of the estate not protected by your wills.

It is vital that such a life policy is structured correctly. If you are married it must be set up to pay out on the second of yourself or your spouse to die. This has the added benefit of significantly decreasing the cost in most cases. The policy must be placed in trust for the beneficiaries of your estate, and needs to be a whole of life policy i.e. one that will last until your ultimate death, not for a specific term.

The effect of this type of insurance is to put a significant tax-free lump sum into the hands of your beneficiaries at a time when they most need it (on your death). This sum could then be used to pay the tax liability. The trust ensures that the money does not form part of your estate for tax purposes. The sum assured will be paid out on evidence of death, with no need to wait until probate or sale of the family home.

The premiums would not be regarded as potentially taxable, as they would normally fall within the £3,000 annual gifts’ allowance, or would be payable out of disposable income.

Although often overlooked, this is the simplest and one of the most effective methods of planning for IHT. The cost will vary according to age and health, but typically a married couple both aged 65 and in reasonable health would pay £200 per month for cover of £100,000.

For more information please contact Simon Ludden, Financial Planning Manager.
 

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