Protect yourself against IHT

The changes announced in the recent Budget have brought significant implications for inheritance tax (IHT) planning. As individuals and families seek to safeguard their estates and ensure that their wealth is transferred efficiently to their heirs, the use of whole of life cover, a staple of IHT planning, has emerged as a pivotal strategy.

Whole of life cover is a type of life insurance policy that provides coverage for the entirety of the policyholder’s life, as long as premiums are paid. Unlike term life insurance, which only covers the insured for a specified period, whole of life cover guarantees a payout upon the policyholder’s death, regardless of when it occurs. This characteristic makes it particularly advantageous for addressing longterm financial obligations, such as inheritance tax liabilities.

Certainty of Payout

One of the most significant benefits of whole of life cover is the certainty of a payout. Since the policy is designed to last for the policyholder’s lifetime, it ensures there will be a guaranteed sum available to cover the inheritance tax liability upon death. This provides peace of mind to the policyholder and their heirs, knowing the necessary funds will be available to settle the tax bill without having to liquidate assets or compromise the estate.

Fixed Premiums

Whole of life policies often come with fixed premiums, which means the cost of the policy remains constant throughout the policyholder’s life. This fixed cost can be advantageous for financial planning, as it allows individuals to budget effectively and avoid the uncertainties of fluctuating premiums. The stability of fixed premiums also ensures the policy remains affordable over the long term, making it easier to maintain coverage.

For a couple, both aged 65 and non-smoking, with a sum assured of £200k that is paid out on the second death, the premiums are approximately £290 per month.

Tax Efficiency

Premiums paid for whole of life cover can be structured in a tax-efficient manner. When the policy is written in trust, the proceeds from the policy do not form part of the deceased’s estate, thereby avoiding inheritance tax on the payout itself. This means that the full amount of the policy can be used to cover the IHT liability, maximising the benefit to the heirs and preserving the estate’s value. For a couple, they could elect to have a 2nd death policy, this allows for assets to be transferred to each other (if they are married or in a civil partnership) utilise the spousal exemption and then have the payout on 2nd death within the couple.

Flexibility

Whole of life policies offer a degree of flexibility that can be beneficial when planning for inheritance tax. Policyholders can choose between different levels of cover and premium structures to suit their financial situation and estate planning goals. Additionally, many policies allow for adjustments to the sum assured and premium payments over time, accommodating changes in the policyholder’s circumstances or tax planning needs.

Pros

• Guaranteed Payout: Ensures there will be funds available to cover the IHT liability, providing financial security to heirs.
• Fixed Premiums: Offers predictability in financial planning with premiums that remain constant over the policyholder’s lifetime.
• Tax Efficiency: When written in trust, the policy proceeds are not subject to IHT, preserving the estate’s value.
• Flexibility: Allows policyholders to tailor the coverage to their specific needs and adjust it as circumstances change.

Cons

• Cost: Whole of life cover can be more expensive than term life insurance, especially for older individuals or those in poor health.
• Commitment: Requires a long-term commitment to paying premiums, which may become burdensome if the policyholder’s financial situation changes.
• Complexity: Understanding the different options and structuring the policy to achieve tax efficiency can be complex and may require professional advice.
• Inflation Impact: The fixed sum assured may not keep pace with inflation, potentially reducing the real value of the payout over time.

In light of the recent changes announced in the Budget, using whole of life cover to insure an inheritance tax liability presents a compelling option for many individuals.

The certainty of a payout, fixed premiums, and tax efficiency make it a valuable tool in estate planning. However, it is essential to weigh the costs, commitment, and potential complexities involved. Speak with us here at Albert Goodman, we can offer advice around the suitability of this strategy as well as ensuring you have the right sum assured for your needs.

Having a whole of life plan in conjunction with other strategies can help make sure you pass as much of your estate on to your loved ones as you can.

The above is for information only and does not constitute advice. Levels, bases and taxation may be subject to change. The Financial Conduct Authority does not regulate estate planning, tax advice or trusts.