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.
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.
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.