Life Insurance to Pay Inheritance Tax

Is Life Insurance the best way to pay Inheritance Tax?

It is usually an expensive route for most clients. When you add up the premiums over possibly 20 years the costs are often a lot more than setting up a series of trust arrangements. This problem is made worse if you have any health problems – as is likely if you are over 60 years old.

At Bluebond Tax Planning, we provide our clients with a comprehensive solutions to all the legal,tax and financial planning elements, which is essential to provide you with the most suitable IHT advice

Inheritance Tax and Life Insurance

Life Assurance is usually the most expensive route and does not avoid the tax but provides the funds to pay it. There are many more cost-effective ways, but basically, it involves giving assets away, either directly or into trust.

Trusts are usually a better route than Life insurance as they enable you and your beneficiaries to not only avoid the inheritance tax after seven years but also help keep control of the assets in the event divorce or bankruptcy of your children. If set up correctly they can also help avoid care home fees.

We do not recommend giving assets directly to your children as they may get divorced and lose your money or even worse, you may lose your home.

Inheritance Tax and Life Insurance

Life Assurance is usually the most expensive route and does not avoid the tax but provides the funds to pay it. There are many more cost-effective ways, but basically, it involves giving assets away, either directly or into trust.

Trusts are usually a better route than Life insurance as they enable you and your beneficiaries to not only avoid the inheritance tax after seven years but also help keep control of the assets in the event divorce or bankruptcy of your children. If set up correctly they can also help avoid care home fees.

We do not recommend giving assets directly to your children as they may get divorced and lose your money or even worse, you may lose your home.

Life Insurance for clients with large assets

For clients whose assets are large and who wish to retain assets in excess of their IHT allowances, this will mean they are liable to inheritance tax.

This arrangement does not avoid the tax but provides the money to pay for it. However, it is usually an expensive option when comparing the long-term premiums against the cost of setting up a trust.

Life Insurance for clients with large assets

For clients whose assets are large and who wish to retain assets in excess of their IHT allowances, this will mean they are liable to inheritance tax.

This arrangement does not avoid the tax but provides the money to pay for it. However, it is usually an expensive option when comparing the long-term premiums against the cost of setting up a trust.

Nil Rate Band (NRB) allowance for married couples

Married couples (or civil partners) who are both UK domiciled or people who have been UK resident for over 15 out of the last 20 tax years will have a Nil Rate Band (NRB) allowance each which can be passed on to their surviving spouse if unused on death.

Currently, the allowance is £325,000 each which means a surviving spouse who inherits a full NRB allowance can hold up to £650,000 in their estate before inheritance tax is payable. Should they wish to hold a higher level than they could insure against the 40% tax by insuring 40% of the excess estate to pay out on death.

Nil Rate Band (NRB) allowance for married couples

Married couples (or civil partners) who are both UK domiciled or people who have been UK resident for over 15 out of the last 20 tax years will have a Nil Rate Band (NRB) allowance each which can be passed on to their surviving spouse if unused on death.

Currently, the allowance is £325,000 each which means a surviving spouse who inherits a full NRB allowance can hold up to £650,000 in their estate before inheritance tax is payable. Should they wish to hold a higher level than they could insure against the 40% tax by insuring 40% of the excess estate to pay out on death.

Does Bluebond Tax Planning provide Life Insurance services?

Although this is the default advice route for most inexperienced inheritance tax advisers, Bluebond Tax Planning does not arrange this type of cover but will refer you to a separate firm of independent financial advisers should you decide you require it as we acknowledge that Life Assurance services do have their place in a comprehensive plan to mitigate inheritance tax.

Does Bluebond Tax Planning provide Life Insurance services?

Although this is the default advice route for most inexperienced inheritance tax advisers, Bluebond Tax Planning does not arrange this type of cover but will refer you to a separate firm of independent financial advisers should you decide you require it as we acknowledge that Life Assurance services do have their place in a comprehensive plan to mitigate Inheritance Tax.

How can you pay
ZERO inheritance tax ?

FAQ

When is it worthwhile putting in life insurance to avoid Inheritance tax?

If you are both in reasonable health and the value of the assets you wish to retain are likely to exceed your inheritance tax allowances on the second death, then life insurance is a viable option and should be considered as part of a comprehensive IHT plan.

Is it worthwhile having life insurance if I am widowed or divorced?

As you are only insuring a single person, the costs of the premiums are likely to be expensive. It would help if you also looked into other methods of reducing the value of your estate for inheritance tax purposes

What happens if I have health issues?

Initial life cover quotes are based on people having good health for their age. If you have a health issue, it will depend if the underwriting team believe this will impact on paying out the policy early. In that event, the policy is either “rated” which increases the premium or certain conditions are excluded or maybe both are applied. In some cases,the cover is refused.

Why should I place my life policy into Trust?

If you fail to put pour life insurance policy into trust the benefit when you die will fall into your estate and so potentially be liable for inheritance tax. This could result in a 40% loss of value to your beneficiaries.

If I have already used up my whole Inheritance tax allowance with a gift into a trust, will that affect my ability to buy a life insurance policy?

Life insurance policy premiums are exempt from counting towards your allowance for inheritance tax, and so you can pay for a life insurance even if you have made the maximum allowable into a trust.

Should I buy a maximum whole of life policy or a standard whole of life policy to pay my potential Inheritance tax bill?

In most cases, you would potentially use both. Most people use standard cover to cover the IHT liability on assets they intend to retain within their estates that are liable for IHT. Maximum cover can be used to cover assets which you tend to gift away soon or at some point in the future but you want to ensure if you died earlier than expected the potential IHT payable would be covered.

The information contained in this web site is for UK consumers only.  Like most firms of solicitors and accountants, Bluebond Tax Planning is not regulated by the FCA. The content of this website does not constitute FCA regulated financial advice and all content is provided for general information purposes only. Bluebond is not responsible for any action you may take as a result of information on this site. All advice will be delivered on a personal basis once we fully understand your situation and our client agreements have been signed.

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