Legitimately avoiding inheritance tax (IHT) is not getting easier. It is an easy tax to collect and growing house prices and portfolio valuations have made the tax bigger. The move from 2027 to include pensions in the taxable estate will further swell the tax collected and their might be more tightening of the rules to come.
On the face of it, IHT should be easy to avoid. If you can identify the amount of money you need to live on, then the rest can be given away. There are several issues with this logic however.
Firstly no one knows how long they are going to live and it is hard to predict expenditure. This means that by the time you can be confident how much is surplus to your needs it can be too late to give it away.
Secondly, many people worry about giving money directly to their children/grandchildren due to the twin risks of spoiling them and encouraging divorces.
A gifting plan is therefore often the work of an entire retirement. With average retirements now lasting 20 years, (65-85) the best way to avoid IHT is to give the money away slowly but consistently.
To protect against the risk of dying early before the gifting has worked there is the option of insuring your life. In simple terms you pay an insurance company a premium and if you die they will pay a lump sum into a trust, that your executors can use to pay the tax.
If you use ‘Whole of Life’ insurance then the insurance company will pay out whenever you die, provided you have always paid the premiums.
There are two types of whole of life insurance. The first is non-guaranteed and the premium remains the same for the first ten years and then climbs steeply thereafter. The second type is guaranteed and the premium stays the same for the life of the policy.
The non-guaranteed policy is cheaper for the first ten years than the guaranteed policy but switches around after that point.
For a women retiring at 65 she might be able to insure herself for a lump sum of £100,000 for £72 per month guaranteed and £205 per month non-guaranteed. This retiree might want to take the non-guaranteed policy because she is confident that over the next ten years she can give enough away to make her family’s IHT bill go away. This would be the cheapest way to achieve that goal. Equally she might decide that the gifting plan was likely to take twenty years and therefore she would rather have the guarantee of a lower premium for life.
These premiums might seem expensive but even with the more expensive guaranteed whole of life she would have only paid in £49,200 in total by age 85. She would need to live to 105 to be even close to having paid in as much as the family get out.
You might reasonably ask at this point how this cover can be as cheap as this. Well two reasons.
Firstly many people don’t keep up premiums and therefore the insurance company keeps all of the premiums and pays nothing out. This means that premiums can be offered more cheaply. You can benefit by making sure that your premiums are maintained and getting a cross-subsidy from the less well organised clients. Sometimes it is the family cancelling direct debits once the insured person has lost capacity which means that these policies lapse.
Secondly if you had kept those premiums and invested them, they would have grown to a larger sum over twenty years. The insurance company is in fact doing this, collecting the premiums across thousands of customers and investing them to gain money themselves.
Both types of whole of life cover have their advantages. The important thing to do is to take out the cover early enough in life, that you are healthy enough to get cover at a reasonable premiums.
Also any life cover without a cashflow plan to back it up is a shot in the dark. Make sure that your adviser can tell you what the plan is to reduce your family’s tax bill over the coming years, before committing to a life-long insurance bill.
We are currently helping clients to live happier lives and avoid inheritance tax for their heirs, across the South East and Nationally from our offices in Hook, Hampshire.