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Inheritance Taxes & Life Insurance Policy - Summary Article Update 2018
What is Inheritance Tax
Inheritance Tax is a tax usually paid on an estate when somebody dies. It's can also sometimes be paid upon trusts or gifts made during someone's lifetime. Many estates don't have to pay Inheritance Tax because they are valued at less than the threshold. It is only due if your estate - including any assets held in trust and gifts made within seven years of death - is valued over the current Inheritance Taxation threshold (£325,000 per person in 2019 until currently 2018). The tax is currently payable at 40 % on the amount over this threshold but Political parties & Governments currently often use this a possible vote winner, each saying they may raise the limits, abolish or amend the terms. See www.gov.uk/inheritance-tax
Increased Inheritance Taxes - threshold for married couples and civil partners
Since 10/2007, married couples and registered civil partners can effectively increase the threshold on their estate when the 2nd partner dies - to as much as £650,000 in 2019 until currently 2018. Their executors or personal representatives must transfer the first spouse or civil partner's unused Inheritance Tax threshold or 'nil rate band' to the second spouse or civil partner when they die. There is also the new £100,000 per person main property tax allowance relief from 4/17. This will figure will currently rise as follows...
- £100,000 in 2017 to 2018
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
Who is responsible for paying that Death Tax known as Inheritance Tax ?
UK Inheritance Tax also known as IHT, Estate tax, Death Tax is payable by different people in different circumstances. Typically, the executor or the personal representative pays it using funds from the deceased's estate. The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheretance tax - but this is less common. Remember that the tax must be paid before the rest of the estate can be distributed.
Valuing an estate to see if Inheritance Tax Liability is due
To find out if Inheritance Tax is due on an estate, you must first value the estate. This means adding up the value of all the assets in the estate - such as a house, possessions, money and investments - and deducting any debts the deceased may have owed, including household bills and funeral expenses. An estate also includes the deceased's share of any jointly owned assets and the value of any assets held in trust. You should also evaluate any gifts that the deceased may have made in their lifetime to see if they are exempt, and if they aren't exempt, include them in the overall value of the estate.
If the deceased has any life insurance plans - then the Insurers is obliged to also notify the Inland Revenue. If there are Lifecover plans in place that are not written in trust - then this could maybe unnecessarily increase their estate & therefore cost or waste 40% of the life insurance payout !
So why consider an Inheritance Tax (IHT) Insurance Plan ?
As mentioned, if your estate is worth more than the threshold your family could be liable to pay death tax on the amount over this figure when you die. Since this is levied at 40%, many people are keen to avoid this! There are many ways that you can possibly avoid paying inheritance tax which is not being discussed here but another way is simply to fund for the liability. Inheritence tax insurance seeks to put enough money aside to pay the tax bills - whenever you die.
How does this Life Insurance Tax Policy work in practice ?
When you have worked out how much tax there is to pay on your death, you can simply take out an insurance plan using this life cover amount on your death. Usually, the most appropriate type of insurance is a whole of life policy. As it sounds, this plan will run for the whole of your life. This is of course because you do not know when you or your partner may die! However, some companies offer joint life 2nd death term life plan's [ see below ].
Single life insurance or joint life insurance plans to pay Inheritance Taxes ?
If you are single or unmarried then you may need to take out a policy on your own life for your own liability. However, if you are married, then you can use an exemption to pass all your assets tax-free to your spouse on your death. While this avoids tax to begin with, the Inheritance tax for the 2nd person to die will end up paying more tax. If this applies to you, then you need to take out a plan which pays out on the second death ie; when the tax becomes due. Remember to take into account all the assets of both spouses. Note to work 100% effectively all plans must be whole of life insurance to work properly. However, any term life insurance that is setup in a suitable trust to a 3'rd party (for reasons other than planning for Inheritance Tax solely ) may still help solve the IHT problem if the insured unfortunately died during the plan term
2 Main types of Whole Life Assurance cover plans exist:
Investment based v Guaranteed premiums
Whole Life Insurance - Investment Based for Inheritance Tax
Your whole of life premiums are invested into a fund to cover the cost of whole life insurance rates. Potentially if surrendered this plan may aquire a value - but that would defeat the object of the policy.
This type of cover aims to balance the level of life cover with adequate investment to support the protection in later years and thus try maintain the original premium throughout life. This relies on the value of units invested in the underlying fund growing at a certain level each year. Poor fund performance or Increased fund charges could result in the premiums being inadequate and may have to be increased to maintain the same level of cover at review.
The initial premiums and the sum insured are designed not to increase for the first 10 years. After this initial period the plan is reviewed and if necessary the whole life plan premiums may be increased.
Note: We do not give advice or do investment based whole life insurance online quotes. We can refer you to a suitable quaified broker from Sesame if you need help with this type of whole life products.
Whole Life Insurance - Guaranteed Premiums - for Inheritance Tax
This type of whole of life insurance policy as the name implies has guaranteed or non reviewable premiums that stay the same throughout the plan but unlike the investment based cover has no surrender value. It can be set up on a single or joint life basis. The cover can be level or also index linked.
Whole of Life Assurance - Uk premiums will depend on the following: sum to be insured, your age, your health, your sex and whether you smoke or not. A non smoker is usually defined as someone who has not smoked for at least 12 months or taken nictotine replacement products. Premiums for women are generally lower as on average they tend to live longer.
Check the quotes & Key Facts documents for each whole life quotation produced.
What is a Gift Inter Vivos Insurance Policy
When a gift is made between 2 people it would be considered part of the donor's estate if they died within 7 years of the gift being made. This would make the amount gifted liable for IHT. The Gift Inter Vivos is a tailored specific 7 year decreasing term assurance policy offered by a few insurers. The sum assured decreases to mirror the UK IHT regulations and offsets the IHT liability on any gifts made, paying out a guaranteed, tax-free lump sum if you die during the policy term. ( Alternatively some insurers suggest just combining 5 term plans to mirror the time frames & sums assured required as the charge decreases ). This policy cannot be written on a joint life basis. The IHT bands that the policy is structured to pay out at are as follows in the 7 tax years:
Gift and Death Charge Applied
Notes (A gift is the transfer of an asset such as property or money etc from one person to another where no payment of any kind is given by the receiving person to the donor. Your estate is the total value of your possessions in whatever form they take.)
What about Joint Life 2'nd death Term Life Insurance to cover IHT liability ?
For some people this maybe a cheaper life insurance option to help avoid any IHT. As they intend to gift away certain specific assets during their lifetime ( to keep below the nil IHT thresholds) it maybe more appropriate to have a joint life 2nd death life plan. Example: Couple decide over next 12 years that they will definately gift away to their 4 children various assets but aware each asset transferance may take time to arrange timewise or not sure exactly when this will start. They decide therefore to take out a joint life 2'nd death term insurance over 12 years ( Rather than take out a potentially more expensive whole lifecover 2'nd death but only needed for say 12 years or several Gift Intervivos 7 year plans each time an asset is specifically gifted away, which maybe administratively more complicated ).
Inheritance Tax IHT & Capital Gains Tax CGT - Life Insurance
Note that gifting away of property assets, other than a main home, may also generate a capital gains tax CGT charge. As such, if you died within 7 years there is potential for both an IHT & CGT charge also ie; 2 tax charges. As such, the need for lifecover maybe still required !
IAM Investments - Inheritance Tax IHT & Business Property Relief Tax BPR - Life Insurance
The government currently allows you to leave trading businesses to your family and without the penalty of currently 40% inheritance tax. This concession is known as business property relief BPR, so it’s designed to make sure people don’t have to sell a business just to pay inheritance tax. BPR provides relief from Inheritance Tax (IHT) on the transfer of relevant business assets at a rate of 50% or 100%.
To benefit from BPR, you must have owned the company, or your shares, for at least 2 years at the time of your death.
BPR doesn’t just apply to family businesses. You could simply have shares in a small, privately owned company. As long as it’s a trading business, the HMRC may decide it qualifies for BPR. Some of the stocks listed on AIM, the smaller companies’ arm of the London Stock Exchange, also qualify for this BPR.
However, if you don’t have a business of your own, you could decide to use a specialist provider that set up trading businesses specifically to help investors manage their inheritance tax situation re BPR. Another BPR option now available is the AIM ISA. The government recently relaxed the Isa rules to allow direct holdings in AIM.
However, please be aware these AIM & IHT Investments are usually at the high end of the risk scale and so should only be entered into after good advice from a qualified professional.
Note: We don't advise on any Inheritance Tax Planning or Investments - so suggest you seek out professional advice from an Accountant / Solicitor / IFA/ Tax Adviser in these areas re your specific circumstances & before looking at any suitable life insurance plans
As such, if you died within 2 years there is potential for both an IHT charge. As such, the need for lifecover maybe still required !
Which Inheritance Tax Life Insurance Trust ?
Most insurers do provide various standard worded trust documents; However, this is a complicated area and could require advice from either your broker or solicitor. But it is very important that you should write your life insurance plan into a trust from the outset for your family, so that any proceeds from the policy go directly to your beneficiaries so do not form part of your estate for tax purpose - otherwise this may defeat the object of the inheritance tax exercise !
Wills and Inheritance Tax
Making a will is also essential if you want to ensure your money goes where you intend it to after you die. It is also a good way to ensure that your family do not pay more inheritance tax than they need to. HM Revenue & Customs has a detailed guide to IHT and will-making - including information on tax-exempt gifts - on its own website. There is also has a glossary of terms and the forms you may need if you are dealing with someone else's estate.
NOTE: Any reference we make to taxation & rates is based on an understanding of current legislation and HM Revenue & Customs practice, which can change from time to time.
FOR PROTECTION PRODUCTS WE USUALLY OFFER FROM A RANGE OF PROVIDERS &
WE ONLY PROVIDE ADVICE ON THESE PRODUCTS - NOT ANY INHERITANCE TAX ISSUES
FOR INHERITANCE TAX - WE SUGGEST YOU SEEK ADVICE FROM AN AUTHORISED PROFESSIONAL ADVISER