Insuring your estate against an IHT bill

Whole of Life policies can offer an alternative to ‘gifting’, allowing you to preserve your family home for the next generation.

If you’re seeking to reduce or eliminate the burden of Inheritance Tax (IHT) on your death, ‘gifting’ while still alive can often be the simplest and most obvious solution.

Gifting involves giving away some or all of your estate to your intended beneficiaries prior to your death.

Limitations of gifting

Given the huge rise in house prices in the last 20 years, gifting can be invaluable in terms of reducing the tax exposure of an estate. But there are limitations.

For instance, gifting your home may not be viable as you may plan on living there well into your later life.

Even an informal arrangement with the beneficiaries that allows you to continue living there indefinitely will remove its ‘gift’ status and make the property liable to IHT.

An alternative solution

An alternative to gifting is to take out a Whole of Life insurance policy. As the name suggests, rather than covering your life for a fixed period of time, the policy lasts until death, with a payment at the end.

The policy could be set up to pay an amount equivalent to the IHT liability, thus preserving the estate.

What’s more, in normal circumstances, a life insurance policy payout would itself add to the estate and be liable to IHT. However, a policy ‘written in trust’ does not count as part of the estate. This is because a trust is a distinct entity that can keep assets in its own right, and needs no human ‘owner’.

Other benefits

Whole of Life policies are often written on a ‘joint life, second death’ basis. Given the estate will pass tax-free to the surviving spouse, this potentially results in a lower overall cost than a ‘joint life, first death’ plan would do.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

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