Strategies to Safeguard your Legacy

Inheritance tax can be a significant concern for many individuals seeking to protect their estates and ensure their loved ones receive their intended inheritance without financial burden. There are different life cover policies that can be used to mitigate these tax liabilities, offering peace of mind and financial security. In this article, we explore different types of life cover policies that can be employed to cover inheritance tax, including gift inter vivos policies for potentially exempt transfers and whole of life insurance plans.

Gift inter vivos policies are specifically designed to cover the inheritance tax liabilities associated with gifts made during one’s lifetime. These policies are crucial for managing potentially exempt transfers (PETs). A PET is a gift made to an individual that is only exempt from inheritance tax if the donor survives for seven years after making the gift. If the donor passes away within this period, the gift becomes taxable, and the inheritance tax liability needs to be addressed.

Gift inter vivos policies typically decrease in value over the seven-year period, reflecting the diminishing likelihood of a tax liability as the donor survives longer. This type of policy provides financial coverage to meet tax obligations if the donor does not survive the PET period, ensuring the recipient is not burdened with unexpected tax bills.

Whole of life insurance plans are another effective method for covering inheritance tax bills. Unlike term life insurance, which provides coverage for a specified period, whole of life insurance offers lifelong protection and guarantees a payout upon the policyholder’s death, regardless of when it occurs.

These plans can be particularly beneficial for inheritance tax planning, as they ensure that a lump sum is available to cover any tax liabilities, irrespective of the timing of the policyholder’s death. Whole of life insurance plans can be structured to align with the projected inheritance tax bill, providing a tax-free payout that can be used to pay the tax due, thereby preserving the estate for the beneficiaries.

Selecting the appropriate life cover policy to manage inheritance tax depends on individual circumstances, including the size of the estate, the value of gifts made and an individual/family’s financial plans. As this can be a complex area, it is recommended speaking with a Financial Planner to discuss the options in more detail.