In a recent Daily Mail article, a family has been forced to sell their extravagant seaside home in the millionaire’s playground of Sandbanks, Dorset, due to being struck by a £3million Inheritance Tax bill.
The property was left to the owner’s son, Frank in 1949, who sadly passed away in 2005, leaving the four children to inherit the property, who now have to sell it. Under Inheritance Tax rules, an estate that has passed to children is exempt from tax for the first £500,000, but anything above that is subject to a 40 per cent levy, which if HMRC settles with the £9m valuation, would mean a bill for the family of more than £3million.
However, there are planning strategies the parents could have used to reduce their Inheritance Tax bill or at least provide the funds to pay the liability, preventing the need for a forced sale of the property. This blog talks specifically about whole of life insurance plans.
Whole of life insurance plan
A whole of life insurance plan can help pay an Inheritance Tax liability in the following ways:
1. Potentially tax-free pay-out – The pay-out from a whole of life insurance policy is usually tax-free. This means that the proceeds can be used to cover the Inheritance Tax liability without incurring any additional tax burden.
2. Ensuring liquidity – Inheritance Tax is typically due within six months of the deceased’s death, and it usually needs to be paid in cash. If the deceased’s estate consists of illiquid assets such as property or businesses, it may be challenging to generate the required funds quickly. A whole of life insurance plan provides a guaranteed pay-out upon the policyholder’s death, ensuring there is a liquid asset available to cover the Inheritance Tax liability.
3. Protecting the value of the estate – Inheritance Tax can be a significant expense, often reaching up to 40% of the estate value. This can potentially deplete a substantial portion of the inherited assets. By using a whole of life insurance policy to cover the inheritance tax liability, the value of the estate can be preserved for the beneficiaries, allowing them to inherit a larger portion of the assets.
4. Optimising financial planning: Incorporating a whole of life insurance plan into an individual’s financial planning can be a strategic way to mitigate the impact of Inheritance Tax. By accurately assessing the potential Inheritance Tax liability and obtaining an insurance policy that covers the estimated amount, the policyholder can ensure that their beneficiaries will not be burdened by a large tax bill.
It is crucial to seek professional advice from a financial adviser or estate planner who can guide individuals through the complexities of Inheritance Tax and help determine the appropriate insurance policy to address their specific needs.
While whole of life insurance plans can be a valuable tool for Inheritance Tax planning, whether they provide good value for money depends on individual circumstances and preferences. Here are some factors to consider:
1. Cost – Whole of life insurance policies tend to have higher premiums compared to term life insurance policies. Since the coverage extends for the insured’s entire life, the premiums are typically higher to account for the longer policy duration. Individuals should assess whether the anticipated cost of the premiums aligns with their budget and financial goals.
2. Inheritance Tax liability – The value of the inheritance tax liability should be carefully evaluated before determining whether a whole of life insurance plan represents good value. If the potential tax liability is relatively small and can be easily covered by existing assets, the higher premiums of a whole of life insurance policy may not be necessary.
3. Estate planning objectives – Consider the larger picture of your estate planning goals. If leaving a significant legacy for beneficiaries is a priority, a whole of life insurance plan can help ensure that the desired assets are preserved and passed on. However, if the goal is simply to minimise the impact of Inheritance Tax, other strategies, such as gifting assets during one’s lifetime or setting up trusts, may be more cost-effective.
4. Health considerations – Insurability can be a factor in determining the value of a whole of life insurance plan. If an individual has pre-existing health conditions or is older, the premiums may be significantly higher or coverage may be more difficult to obtain. In such cases, alternatives like setting up a trust or exploring other tax planning strategies might be more suitable.
5. Professional advice – Consulting with a financial adviser or estate planner is crucial when considering the value of a whole of life insurance plan for Inheritance Tax planning. They can analyse your specific circumstances, help determine the best approach, and compare the potential costs and benefits of alternative strategies.
Comment
Ultimately, the value of a whole of life insurance plan for Inheritance Tax planning depends on personal circumstances and preferences. It is essential to carefully consider factors such as cost, Inheritance Tax liability, estate planning goals, insurability, and seek professional advice to make an informed decision.
How can we help?
Zoe Till is a Partner and Chartered Financial Planner in our expert Investment Management team. Zoe’s areas of expertise include investment advice, retirement planning, Inheritance Tax and lifetime cash flow modelling.
If you would like any advice concerning the subjects discussed in this article, please get in touch with Zoe or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online form.
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