Prudential Life Assurance - Inheritance Tax

thigger

Hi,

My wife's aunt passed away and we are trying to sort out her estate and apply for probate. With her house, and the fact she can't make use of any extra nil-rate band there is going to be inheritance tax to pay - and unfortunately not enough easily-accessible cash to pay it.

She had a Prudential "RD1" life assurance bond which has enough to pay the tax, but Prudential are being evasive about whether this can be used to pay the inheritance tax directly (via the IHT423 direct payment scheme) and keep sending us requests for probate letters on the assumption we want the money paid to ourselves.

To avoid having to borrow money or pay HMRC's interest rates until the house is sold, does anyone know if we can get Prudential to pay this money directly to HMRC before probate is granted? Given that they advertise their life assurance policies as a product to pay inheritance tax, I'm wondering if I'll have to suggest involving an ombudsman?

Thanks for any advice.

dunstonh

She had a Prudential "RD1" life assurance bond which has enough to pay the tax, but Prudential are being evasive about whether this can be used to pay the inheritance tax directly (via the IHT423 direct payment scheme) and keep sending us requests for probate letters on the assumption we want the money paid to ourselves.

Pru are not being coy. They do not have the regulatory permissions to cover potential scenarios. Unless the policy is in trust or there is another policy owner, the proceeds from surrender will be paid to executor. Or the policy can be assigned.

Given that they advertise their life assurance policies as a product to pay inheritance tax, I'm wondering if I'll have to suggest involving an ombudsman?

Investment bonds do have the potential to reduce IHT liabilty. However, its how you set them up that matters. If they are not set up in trust, then the proceeds are part of the estate.

What exactly do you think they have done wrong that makes you think an ombudsman should be involved?

What is the value? (Pru will need probate on medium to larger values).
Why are you against getting probate when it will solve your problems?

thigger

dunstonh wrote: »

Pru are not being coy. They do not have the regulatory permissions to cover potential scenarios. Unless the policy is in trust or there is another policy owner, the proceeds from surrender will be paid to executor.

So you reckon they simply can't use the HMRC direct payment scheme? Seems strange (though I'm no expert) - and I feel they shouldn't be selling this as a product for paying inheritance tax if they can't.

Why are you against getting probate when it will solve your problems?

Not against it - but the inheritance tax bill needs paying before they'll grant probate! It seems absurd to have to borrow money to pay the bill when Prudential are sitting on enough of her cash to pay it, in a product they advertise as being "to help pay an inheritance tax bill". I'm hoping that the people we've been speaking to at Prudential are simply getting the wrong end of the stick and assume we're after the money without probate, rather than understanding that we would like it paid direct to HMRC.

HappyHarry

As said above, Prudential can not pay it direct to HMRC. They do not operate bank or building society accounts or NS&I products and so can not use IHT 423.

However, if the policy is in a trust, then the beneficiaries can claim the funds, which will be outside your mother's estate, and use these funds themselves to pay the IHT bill.

However, if the policy is not in a trust, there is nothing Prudential can do.

Did your mother receive advice when setting up the policy? If so, you would be best to speak to the advisers and establish whether or not there is a trust.

thigger

HappyHarry wrote: »

As said above, Prudential can not pay it direct to HMRC. They do not operate bank or building society accounts or NS&I products and so can not use IHT 423.

Thanks for confirming (they've never expressly denied it, just repeatedly talked about releasing funds to executors after probate) - irritating that there's no way of using the money to pay inheritance tax. Presumably there's no way that even persuasion via the route of pointing out their dodgy advertising can fix it?

Did your mother receive advice when setting up the policy? If so, you would be best to speak to the advisers and establish whether or not there is a trust.

Not in trust unfortunately - I don't believe my wife's aunt used an independent adviser, though she certainly had "a man at HSBC" who gave her advice of a sort (though it appears he only sold her their products). The quality of the "advice" she may have received certainly doesn't look good when we're faced with this (mostly avoidable) inheritance tax bill, but as a family there's not much we can do and there's little point getting angry about it!

dunstonh

So you reckon they simply can't use the HMRC direct payment scheme? Seems strange (though I'm no expert) - and I feel they shouldn't be selling this as a product for paying inheritance tax if they can't.

Pru are not selling them to pay for inheritance tax. They are a tax wrapper that can be used for estate planning but only in conjunction with trusts (and potentially assignment in wider tax planning). If a trust is not used then standard ownership rules apply.

Presumably there's no way that even persuasion via the route of pointing out their dodgy advertising can fix it?

There is no dodgy advertising. Estate planning is not the same thing as paying the IHT bill directly.

The quality of the "advice" she may have received certainly doesn't look good when we're faced with this (mostly avoidable) inheritance tax bill, but as a family there's not much we can do and there's little point getting angry about it!

There is nothing to suggest any wrongdoing here. Until relatively recently, investment bonds were extremely popular as an investment tax wrapper. It was only a number of changes made in respect of taxation in dividends and the large increase in the ISA allowance that made their popularity fade away. That said, i still have a number of Pru bonds on my books which do not justify replacing. Old pru bonds (circa turn of the millennium) were low cost and have a habit of turning in very consistent returns through good and bad with an element of capital security. Exactly the sort of thing a inexperienced retired investor was looking for. You cannot buy that sort of thing cost effectively nowadays.

Just because a product/tax wrapper doesnt do what you want it to do, does not make it bad or wrong.

Surely, the easiest thing here is just to surrender the bond after probate and the money paid into the bank then pays the tax bill?

agrinnall

thigger wrote: »

Not against it - but the inheritance tax bill needs paying before they'll grant probate!

I think you need to investigate this a bit more, as it's not as simplistic as you make out. The guide to obtaining probate states:


"Subject to the requirements to pay some of the tax before obtaining the grant, inheritance tax is due six months after the end of the month in which the person died"


The key word there is "some", not all.



https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/718876/pa2-eng.pdf


Once the grant has been obtained then it's possible to pay the outstanding IHT in annual instalments:


https://www.gov.uk/paying-inheritance-tax/yearly-instalments

thigger

dunstonh wrote: »

Pru are not selling them to pay for inheritance tax.

They are advertising that on their website today; though I accept your point that they are potentially usable for that if set up in trust and I have no idea what exact discussions she had (she certainly didn't plan on dying this young!)

Surely, the easiest thing here is just to surrender the bond after probate and the money paid into the bank then pays the tax bill?

agrinnall wrote: »

The key word there is "some", not all.

Unfortunately HMRC has life assurance on their list of things they won't let you use the installment option for (only her house seems to fit) so the majority of the tax needs paying before they'll grant probate (what a brilliant catch-22!).

However, on looking at the numbers last night I think we can select the installment option, cobble together enough money from the family to pay the tax due on the life assurance, then when probate is granted use the life assurance to repay the family and pay the rest of the bill before the first installment is even due.

Frankly this setup is bonkers - the government seem to be assuming that life assurance can be used to pay IHT directly, denying us the installment option for it and forcing people into loans etc. Prudential haven't even officially told us that it can't be paid directly to HMRC - when they answer messages they ignore that question and only talk about what happens when probate is granted. Though from the responses here it sounds like it's not worth pursuing that angle.

Thanks for the help!