Inheritance Tax Planning

ianconfused

Hi Guys,

first post so apologies if I break any rules. Point out my error and I'll do better the next time.

A few deaths in the family recently which turned our minds to inheritance tax. So spent the last few weeks reading up on this and probably more confused now than when I started. Anyway, similar to most people our biggest problem is the house. We'll probably downsize at some point (10-15 years) but between now and then the kids would likely have to sell the house to pay the inheritance tax due. Apparently one way to avoid this is to take out a joint, last survivor term life assurance written in trust. Amount would be the likely inheritance tax due on the house, term would be 10-15 years. Sound like a plan, at least for the short term? However, despite trawling the web for what seems like days I can't track down anyone who seems to quote online for this. Can anyone point me in the right direction? Of course it may be that no one does quote online and I'd have to get quotes some other way??

Any help appreciated, meantime I'll keep looking.

xylophone

http://news.bbc.co.uk/1/hi/business/8201355.stm
http://www.which.co.uk/money/insurance/guides/how-to-buy-life-insurance/minimise-your-estates-inheritance-tax-bill/
http://www.creditfinancecentre.co.uk/article41.html
http://www.lifeassureonline.co.uk/whole-of-life

http://www.life-saver.co.uk/instant-whole-of-life-insurance-quote.html
http://www.confused.com/life-insurance/whole
http://www.money.co.uk/life-insurance/whole-of-life-life-insurance.htm
The above might be worth a look.

sebastianj

Or do a PhD in finance,
Why not just answer the question?
seb

grey_gym_sock

i'm not sure i follow the logic of this kind of insurance ...

basically, on average, you'll pay slightly more in insurance premiums than you'd pay in inheritance tax if you don't take out this insurance. (or insurance companies wouldn't be selling it.) so what is the point of it?

there may be a good answer to that. e.g. your children still live in your house, and there's good reasons why they'd need to stay there. but if they would probably be selling the house anyway ...

more generally, what would the financial effects be on your children if you died? if you're still supporting (some of) them, clearly you'd want make sure they're provided for. if not ...

what are you trying to achieve? paying premiums that are on average just as large as the tax they cover isn't really saving inheritance tax at all. it's just placing a bet on your own lives being shorter.

if your children are grown up and self-supporting, they would gain financially (even after paying inheritance tax) - though of course lose in more important ways - from your early deaths. taking out insurance would just mean they'd gain even more financially.

sorry if this seems offensive. just trying to provoke thought.

ianconfused

Good question which deserves an answer.

Probably simplest if I quote some figures. Before that though some background.

We're both quite young (I'm less than 55 and my wife is less than 50). A joint life last survivor term assurance would only pay out if both of us die during the term. Since we're both quite young the chances of us both dying before I'm 70 and my wfie 65 is fairly small. So the premiums are also fairly reasonable. As an example the inheritance tax on the estate would roughly be £180K. A single life term assurance for this amount for my wife is about £30 per month. A joint life last survivor term assurance should be even cheaper (because the risk of only my wife dying is a bit less than both of us dying) - assuming I can find someone to quote that is! But lets take £30 per month as a worst case which would mean us paying £30 per month for 15 years - roughly £5.5K. So by paying this we would save the kids £180K in inheritance tax and they wouldn't have to sell the house. As I said its a fairly small chance that we both die but there is still a chance ... I think this is worthwhile, others may not.

Now it would be different if I was talking about a whole of life policy which would definitely pay out at some point. If this was the case the premiums would be much, much higher.

As I said we plan on downsizing the house at some point which will release excess capital. What we do then to avoid the taxman getting his slice I'm not sure but I'll worry about this later.

PS Thanks Xylophone for the links. I'll have a look through them when I have a bit more time. If anyone else has any more suggestions of where to look I'd be obliged.

kidmugsy

Remember to ensure that the pay-out from the policy goes to the children (or to a trust) , not straight back into the estate of one or both of you.

getmore4less

ianconfused wrote: »

As an example the inheritance tax on the estate would roughly be £180K.

Thats will be on an estate of £1.1 million so small change.

If one of you dies there is scope to mitigate before the other so the main risk is bot of you early

John_Pierpoint

Not really if there is no easily realisable wealth in the family. The house might have to be realised to pay the tax, though the tax man will take payments spread over several years if it is due on real estate.

I am trying to think of an easily explicable example, as I was in this situation when my own father popped his clogs aged 50, but in those days the spouse exemptions did not exist.

Could either of the couple be beneficiaries of interest in possession trusts? Are these values included in the £1.1 million? Perhaps the £180 is net of spouse exemptions and the wealth is considerably more?

Perhaps the Original Poster can explain a little further the perceived risks in the joint estate.

harvey1964

wrote: »

My parents were advised to take out some kind of insurance policy that would mean us paying less IHT. Myself and two siblings now split the premium between us as we will benefit. Is this a good thing?

I have definitely heard of this. anyone know what its called ?
it means the tax is paid on inheritance for you.

ianconfused

What I was looking for was some guidance on where to look for a joint life, last survivor term assurance policy. Xylophone has given a few sites which I'm still going through so hopefully I'll be able to obtain a few quotes from these. As I've indicated if anyone else has any suggestions on this I'd be obliged if you could pass them on.

However, sounds like a few people are interested in this so I'll explain a bit more about the circumstances.

Total estate is about £1,100K (spot on getmore4less but would guess there are quite a few people who wouldn't think it was small change, ;-) ), house value around £700K with balance in cash, ISAs, shares etc.

Husband and wife still reasonably young (53 and 49).

Couple of youngish kids aged 9 and 7.

Planning to retire fairly soon (next 6 months or so). We both have final salary pensions which would cover our living expenses. We'll burn some of the excess capital to cover any luxuries and also any emergencies that come up.

Don't want to transfer excess capital to the kids at the moment since we're not certain how much we will burn. Also, who knows what the immediate future will hold?

We plan to downsize the house at some point within the next 10 to 15 years. This would likely release additional capital.

As it stands at the moment if we both snuffed it the kids would inherit the lot and the estate would be due about £180K in inheritance tax. Our wills specify who would be guardians until they reach a specified age.

We don't want the kids to have to sell the house to cover the inheritance tax. A way of protecting against this is to take out a joint life, last survivor term assurance for 15 years (i.e. until we downsize). This would be written in trust payable to cover the inheritance tax liability. Don't know the actual cost of this insurance policy (since I can't find anyone to quote) but a single life term assurance policy for my wife only is about £30 per month which should be more expensive than the joint life, last survivor policy (since the chance of us both dying during the term is less than just my wife dying). So cost of the insurance policy is about £5.5K for the whole term but saves the kids £180K in inheritance tax if we both die during the next 15 years. We think this is worthwhile doing but others may not.

What happens if only one of us dies during the next 15 years or what happens when we downsize is something we need to think about a bit more. But with the gender ruling for insurance companies coming in we want to get the term assurance set up before the insurance companies jack up the premiums. So that's the priority.