The Use of Life Assurance in Inheritance Tax Planning (IHT)

As the value of assets have grown over the past decades, combined with legislation bringing more assets such as pensions in to the scope of inheritance tax, many more people are facing inheritance tax liabilities when they pass on.

This is reflected in the rising receipts in inheritance tax to the treasury which are only predicted to rise further. Some of this is down to demographics – the “baby boomers” represent a generation where a much greater proportion of the population owned property and accumulated savings.

There are many sensible steps to mitigate your inheritance tax liability before considering life insurance, the detail of which is beyond the scope of this note, however, in some form or another this will involve spending or giving away assets, in conjunction with ensuring your will captures all reliefs available.

Practically, this means people need to retain a level of wealth to meet their lifestyle requirements in retirement and to ensure they have a suitable roof over their head, meaning there may still be a residual inheritance tax liability on their estate. As I have mentioned already, this is now being exacerbated further with the inclusion of pension assets in the IHT calculation. For various reasons, you may also not be ready to give away your assets.

Life assurance can play a short, medium or long term solution in these circumstances, and subject to underwriting can be surprisingly affordable, especially when you consider the net benefit to your inheritors.

Policies can be arranged on a short term basis to cover liabilities related to large one off gifts, or on a medium term basis to cover the period until you are happier to be moving assets down the generations, or on a permanent basis to cover the residual liability to tax on the assets you intend to hold for your lifetime.

We are spending an increasing amount of time in client meetings considering IHT mitigation strategies, including working closely with private client solicitors and tax advisers to identify the best approach a family can take, and where appropriate, life assurance can play a part in the solution.

It does take some “getting your head round,” as it is not something most clients see as the purpose of life assurance, but that is where I enjoy helping clients understand the advantages, disadvantages, and costs.

This article does not constitute tax, legal or financial advice and should not be relied upon as such. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. For guidance, seek professional advice.

Note that life insurance and financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, the cover will lapse.

The Financial Conduct Authority does not regulate estate planning or tax planning.