advice on insurance to cover inheritance tax

littlerock

I am in the fortunate position of having lived in the same London house for 30 years. during that time it has increased considerably in value.

While I took out a whole of life insurance policy at the time of purchase to cover the mortgage should anything happen to me while my family was young , as i have got closer to paying off the mortgage , so the value of the policy has been reduced by the insurance company . So now it is only worth quite a modest amount. Meanwhile the value of the house has soared. The mortgage has a couple of years to run but I could pay it off now.

I am unmarried with one son who has been living abroad but is soon to return to the uk. He is married with two small children. I am in my mid 60s and in good health.Semi retired. I plan to leave the house to my son who would like to live in it eventually. however I am wondering if there is any insurance he can take out (helped by me) to mitigate inheritance tax which will be large ?

mgdavid

how can you know inheritance tax will be large?
You could/should live another 30 years, what will you use to pay for care and possible care home fees if you get to the point where you can no longer look after yourself, which might be in 2 years or 20 years?

To directly answer your question, yes a life insurance policy will do the job.

Mistermeaner

Think there may be some confusion in reply above - good point regards knowing what inheretence tax will be, but dont think life insurance will cover inheretence tax risk.

If you want to try to 'avoid' your son being crippled with tax in the event of your death I think you need to transfer the property to him at least 7 years before you pop your clogs.

Probably best speak to solicitor about how this is done.

Mistermeaner

Just to clarify; you can of course take out a policy that pays out cash which can if you set the limits correctly cover the iht Bill, but probably the best way is the gifting of the assets long before you die.

I'm no expert but I believe you can gift the assets AND take a decreasing life insurance policy over 7 years to cover the period when your estate will be liable for iht

Obviously the older you get and the bigger you want the pay out to be the higher your premiums become to the point it may become unviable at some stage

Teaandscones

ggb1979 wrote: »

If you want to try to 'avoid' your son being crippled with tax in the event of your death I think you need to transfer the property to him at least 7 years before you pop your clogs.

Probably best speak to solicitor about how this is done.

You must either move out of the property or pay a market rent to your son otherwise HMRC will still count it for inheritance tax. Worse, your son could then be potentially liable for capital gains tax.

kidmugsy

littlerock wrote: »

While I took out a whole of life insurance policy at the time of purchase to cover the mortgage should anything happen to me while my family was young , as i have got closer to paying off the mortgage , so the value of the policy has been reduced by the insurance company .

That doesn't sound like a Whole of Life policy to me. It sounds like a conventional mortgage protection policy - a term policy with a declining sum assured. And it's not "reduced by the insurance company", it's reduced by the agreement you made on purchasing it.

littlerock wrote: »

. However I am wondering if there is any insurance he can take out (helped by me) to mitigate inheritance tax which will be large ?

The classic thing would be for you (not him) to take out a Whole of Life policy, arranged in trust so that it pays out to him without entering your estate. Your subscriptions would in principle be exposed to IHT, but would normally be exempt by virtue of some combination of being paid out of surplus income or out of the normal annually exempt gift amount. You'd want to ensure that your deal is for a level annual payment.

BUT, BUT, BUT (i) Do absorb mgdavid's point, and (ii) do consider the possibility that IHT won't exist when you die, having been replaced by, say, an "accessions tax" on the Irish model.

At the very least, I'd wait to see who wins the General Election, and what their plans are for IHT.

xylophone

http://www.which.co.uk/money/insurance/guides/how-to-buy-life-insurance/minimise-your-estates-inheritance-tax-bill/

might be worth a look.

You might consider making your son/your grandchildren regular gifts from income.

For the grandchildren this might be achieved by setting up a bare trust for each through an IT savings plan. Example http://www.bailliegifford.com/individual-investor/how-to-invest/investing-for-children.aspx

You might consider gifting half the house to your son, holding it as tenants- in-common but in view of his residence abroad this would require thought and care

http://www.out-law.com/en/articles/2014/december/uk-government-finalises-new-capital-gains-tax-charge-for-non-resident-homeowners/
..http://www.taxbar.com/Giving_Away_Part_of_the_Family_Home_to_Avoid_IHT_Whilst_Continuing_to_Live_There_Patric.pdf

Before doing anything you should take expert advice.

mgdavid

Teaandscones wrote: »

You must either move out of the property or pay a market rent to your son otherwise HMRC will still count it for inheritance tax. Worse, your son could then be potentially liable for capital gains tax.

OP - this is exactly why I suggested a Life insurance policy; also look up 'deprivation of assets' in relation to claiming care home fees from the State (local council).