Life Assurance Policy & Inheritance Tax

Recoil101

Helpful folks,
My father has had a whole of life assurance policy for many decades and my parents have assets which are valued at more than the current inheritance tax threshold. The policy is with Prudential and is 'tax free'. I've explained to my father that 'tax free' does NOT include inheritance tax as the policy would have to be cashed in on death and would therefore form part of the estate prior to inheritance tax being calculated. (Am I right on this??)

I've further read that a life assurance policy could be placed in trust in order to avoid inheritance tax. Unfortunately, the info I've managed to find is somewhat vague. If my father placed the policy in trust to myself and my sister (the beneficiaries of his will), would this only work if he survives for a minimum of 7 years after the trust is created??
Any info, tips would be greatly appreciated!!!

Many thanks
Recoil

John_Pierpoint

Why not phone the Prudential, who I have found really professional & user friendly, and check out what is possible for an old fashioned type policy.
(Then let the rest of us know)

dunstonh

The policy is with Prudential and is 'tax free'.

if it is investment backed then it is not tax free. If it is non-investment linked then it could be subject to IHT unless it was placed in trust.

I've further read that a life assurance policy could be placed in trust in order to avoid inheritance tax. Unfortunately, the info I've managed to find is somewhat vague.

There are a number of different trusts that can be used to suit different needs. Plus, Gordon Brown killed off or damaged certain trusts (from a suitability point of view). So, a lot of old information wouldnt apply to new business. So internet coverage should be viewed with care as date it was written would be key.

brianrhill

Remember that there is no IHT liability between spouses, and is most often chargeable on 2nd death where the estate and some historical disposals are valued and distributed.

It is vitally important to get a complete picture of an estate, not just the home and insurance policies, and equally important to be aware that a beneficiary may well have to cough up the IHT due for something they can't or would rather not sell (e.g. poor housing market).

Recoil101

Thanks for the replys. Ive been in touch with Prudential and also checked the rules with HMRC and it seems that that the best route to take is to place it in trust. This would mean that if my father survives another 7 years, there would be no inheritance to pay. Unfortunately, tapered relief will not be available because gifts use up the allowance first (its currently worth £150k), so if he survives 6yrs and 11mths, the total tax bill will rise by a whopping £60k :-(

As the original policy was taken out prior to March 1968, it is indeed still tax free of income tax or capital gains tax, so that's a relief (no pun intended...).

Prudential did say that it might be eligible for inheritance tax tax-free status and that they'd look into it. I can't see how that's going to be possible though. If he dies and my mother inherits everything, as the poster above said - the tax would be deferred until her death, at which point I get hit with the tax bill. It's a bit like an ISA, it's tax free but at death it has to be cashed in, at which point it's a target for inheritance tax.

Anyway, thanks again.

P.S. oh and another thing for anybody reading this in the future in a similar circumstance is that by placing it into trust, it can be released to the beneficiery(s) immediately on cashing in. That means that the money is available to help pay the inheritance tax bill and get the estate released.

kidmugsy

A different route would be for him to cash it in and invest the proceeds in something else that does a better job of avoiding IHT:some investments do the trick in 2 years rather than 7. Some AIM shares, forestry (I think) ... these are things I've seen mentioned in the papers. To avoid a £60k hammering, it would be worth paying for expert advice.

Recoil101

Thanks for that. I wasn't aware of AIMs at all, I'll do some more reading up and then, as you say, I'll get some pro advice. Many thanks

chrismac1

Forestry is probably a safer and cheaper option - unless you expect a worldwide tree disease blight sometime soon! The better forestry investments invest in various different forests in different parts of the UK.

dunstonh

As the original policy was taken out prior to March 1968, it is indeed still tax free of income tax or capital gains tax, so that's a relief (no pun intended...).

That doesnt make it tax free. it is because tax is paid at 20% at source (minus taper relief - so effective rate is often closer to around 13%).

That said, it would qualify for LAPR on the premiums (tax relief). That ceased to be available on new business after mid 80s but those that had it got to keep it.

Surrender would give rise to a chargeable event which could impact on income tax (whole of life plans are non qualifying)

John_Pierpoint

chrismac1 wrote: »

Forestry is probably a safer and cheaper option - unless you expect a worldwide tree disease blight sometime soon! The better forestry investments invest in various different forests in different parts of the UK.

Listen to this before your clients do.

OMG the 7,000,000,000 strong species has finally pushed the environment too far???;)

http://www.bbc.co.uk/programmes/b016x2k8

John.

PS My conker trees have got that "brown leaf weevil" problem too.
http://www.forestry.gov.uk/fr/INFD-68JJRC
http://www.forestry.gov.uk/website/forestresearch.nsf/ByUnique/INFD-6KYC5F
http://www.forestry.gov.uk/website/forestresearch.nsf/ByUnique/INFD-6KYBN2
Like Dutch Elm disease it looks like another one that has come in via Tilbury docks or is it LHR this time?

dunstonh

Or you could just read hitchhikers guide to the galaxy to find out what happened when leaves were made the legal currency