Inheritance Tax Planning

As a single individual, when you die and leave an estate – the total monetary value of most of the things you own on the date of your death – worth more than £325,000, your estate pays inheritance tax (IHT) at 40% on anything above the £325,000 nil-rate band threshold.

This can be a considerable burden on those you wish to inherit as they must pay the tax before accessing your estate.

There are some reliefs and allowances available to reduce your inheritance tax bill. If you’re married or in a civil partnership and leave your entire estate to your surviving spouse/civil partner, the survivor can use your £325,000 allowance as well as their own, effectively allowing them to pass on £650,000 tax free to whomever they wish to inherit.

There’s also an additional allowance for people passing on their family home, known as the main residence nil-rate band. This is set at £175,000 per person and works in the same way as above if you are married or in a civil partnership. This means that if you own your own house and are married or in a civil partnership you shouldn’t have any inheritance tax to pay unless your joint estate is worth over £1,000,000.

Inheritance Tax insurance most often takes the form of Whole of Life cover. Whole of Life Insurance is a life insurance policy that provides coverage for your entire life. When incorporated into Inheritance Tax planning, it offers a unique way to mitigate the impact of IHT on your estate.

1. Tax Efficiency: One of the primary advantages of Whole of Life Insurance in IHT planning is that the payout is generally exempt from Inheritance Tax when you write your policy in trust. This means that your beneficiaries can receive the full death benefit without worrying about a significant tax liability. Writing the policy in trust also means it bypasses probate, allowing the beneficiaries to access the funds to pay the inheritance tax to unlock the rest of your estate.
2. Estate Preservation: Whole of Life Insurance ensures that your estate can be passed on to your heirs without the risk of IHT eroding a substantial portion of your assets. This can be especially important if you have significant assets and want to leave a substantial inheritance.
3. Liquidity for IHT Payment: In situations where the estate might not have enough liquid assets to cover the Inheritance Tax liability, the death benefit from the insurance policy can be used to pay the tax, ensuring that your assets remain intact.
4. Estate Equalization: If you have specific assets you wish to leave to certain beneficiaries, Whole of Life Insurance can help equalize the distribution by providing a tax-free benefit to those who would otherwise receive less.
5. Estate Planning Versatility: Whole of Life Insurance can be customized to meet the unique needs of your estate planning strategy, allowing you to choose the coverage amount and policy terms that align with your objectives.