Despite the many ways to legitimately plan to reduce or eliminate any tax liability on death, for some people there may still be tax due when they die.
Often this is the case where properties form the majority of the assets. In these cases, the traditional option of taking out insurance to pay the tax can be very effective and is a simple option that can be set up quickly if in good health.
The most common type of policy that is used is a whole-of-life policy, with a guaranteed premium that never increases and a fixed sum assured. For married couples who are initially leaving most of their assets to each other when they die, these are taken out on a joint-life second-death basis so that the policy pays out after both have passed away, ie when the inheritance tax is due.
It doesn’t need to cost a great deal of money to insure against the tax liability. For example, to insure against a tax liability of £100,000 it would cost a married couple aged 60 £1,250 per annum for a policy that guarantees to pay out £100,000 after they both die. This, of course, assumes that they are in good health when they take out the policy.
The couple would have to live for 80 years, ie 140, before they would have paid more into the policy than what will be paid out on their death.
The reason why this appears to be such good value is that statistically many of these policies are cancelled before the policy holder dies and this type of policy doesn’t pay out any money if it is cancelled.
Inflation is also a factor, in that £100,000 won’t be worth as much in 20-30 years as it is now. To counteract inflation, these policies can be taken out with a sum assured that rises in line with inflation each year.
It is very important to remember to set up an appropriate assurance trust to wrap around these policies to avoid the pay-out being taxed at 40 per cent on death.
David Hill is a Chartered Financial Planner and Trust & Estate practitioner at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: firstname.lastname@example.org