Life insurance for married couple to mitigate IHT

planforfuture

We are retired couple and have estimated that my child will be subjected to £300k (after deduction of 40% tax rate band) IHT after we both have left.

To mitigate the IHT burden, we are thinking of taking out a whole/term life insurance (into a trust) each to cover £150k.

If me or my other half leaves first, neither one will need the £150k anyway.

Is this a good strategy or there are better solutions?

Please advise.

Flugelhorn

I was quoted for insurance specifically to cover IHT - the quote was interesting as it was way lower over goodness how many years than the amount of IHT it was to cover - the reason being is that you have to keep paying and lots of people don't. 

life insurance sounds good but guess it could be pricey 

planforfuture

Yes agree. Just a thought tbh to ease the pain for my child to avoid the need to source the £300k IHT before the estate can be released to him.

Are there any other more effective options?

HappyHarry

Lots of other options available - insurance is usually the last resort.

Spending more than your income allows you to reduce your estate and enjoy some benefit from your own wealth.

Gifting assets to your child now could reduce your estate - especially if you live for seven years after you make the gifts.

Certain investments enjoy 100% IHT relief after you have held them for two years - though there are risks.

All the above are worth thinking about before insurance. Insurance is useful if you have a large asset, such as a family home, that you want to leave to your child. The downside with insurance is that the cost of it (and the lost opportunity for growth on the premiums) can exceed the liability it is designed to cover.

Marcon

planforfuture said:

We are retired couple and have estimated that my child will be subjected to £300k (after deduction of 40% tax rate band) IHT after we both have left.

To mitigate the IHT burden, we are thinking of taking out a whole/term life insurance (into a trust) each to cover £150k.

If me or my other half leaves first, neither one will need the £150k anyway.

Is this a good strategy or there are better solutions?

Please advise.

Just double checking.... Under current legislation, and assuming the first spouse to die leaves everything to their surviving spouse/there is a property involved, there would be £1m available before IHT becomes payable (£325K x 2 + £175K x 2), so you are expecting to leave an estate worth at least £1.5m?

You've mentioned in other threads that you have SIPPs. How much of those would be available to pay IHT liabilities - although I appreciate that's going to be a moving number!

Keep_pedalling

This would suggest your joint net worth is currently £1.75M. If a good chunk of this is in liquid assets then making a substantial gift now would be an option. You can cover IHT on any such gift arising from an untimely death with 7 years term insurance which will be a lot cheaper than full life insurance. 

poseidon1

planforfuture said:

We are retired couple and have estimated that my child will be subjected to £300k (after deduction of 40% tax rate band) IHT after we both have left.

To mitigate the IHT burden, we are thinking of taking out a whole/term life insurance (into a trust) each to cover £150k.

If me or my other half leaves first, neither one will need the £150k anyway.

Is this a good strategy or there are better solutions?

Please advise.

If you, like a vast swathe of the population, have the bulk of your wealth in the family home, then life assurance may well be one of the few options open to you, although as mentioned by Marcon your sipps could potentially assist, depending on death occurs.

Problem for you is the monthly/ annual cost. Whole of life pays out whenever you die so by its nature it is building up an investment value over the years as well as covering the insurance risk if you die early in the policy period.

However, given your objective ( to assist your daughter in paying IHT when the time comes), only whole of life cover can guranteed to do this. With term policies you risk out living the  term, with the worse of all worlds ie failure to provide for IHT and wasting many years of premium payments along the way.

Therefore of the two and despite the cost, I would tend to favour whole of life over term cover for the reasons stated.

If you have a significant amount of liquid capital, you could also consider life company investment bonds in trust, which give you a potential income ( via bond withdrawals ), with the potential for bond growth to accrue outside your estate for IHT purposes. 

Gift and loan, together with discounted loan schemes would tend to be  the favoured vehicles for these investment bond based iht mitigating solutions, but do require a clued up IFA to explain the benefits, disadvantages and potential income tax complications inherent therein. Worth exploring if your have sizeable savings available to be deployed.

german_keeper

Is this mainly an issue for people as poseidon1 quotes with the vast majority of their estate in property and presumably the IHT tax being due when the property hasn't been sold?

We may find ourselves in a position where IHT is due but the large proportion of my mum's estate will be in savings. She is fully funded under S117 and income is currently exceeding expenditure by about £30k pa. So presumably we would just pay the bill from the savings. Or is it something to do with the IHT being due before the paperwork is actually complete on the estate, which to be honest does sound bonkers.

Marcon

german_keeper said:

Is this mainly an issue for people as poseidon1 quotes with the vast majority of their estate in property and presumably the IHT tax being due when the property hasn't been sold?

We may find ourselves in a position where IHT is due but the large proportion of my mum's estate will be in savings. She is fully funded under S117 and income is currently exceeding expenditure by about £30k pa. So presumably we would just pay the bill from the savings. Or is it something to do with the IHT being due before the paperwork is actually complete on the estate, which to be honest does sound bonkers.

Not really. IHT is payable six months from the death, and many estates won't be nearly ready to apply for probate by then. Also think how many people would cheerily distribute the assets and only then consider...that's why probate can't be granted until the IHT issue has been satisfactorily addressed.

See https://www.gov.uk/paying-inheritance-tax

OP, you might also like to look at that link, including https://www.gov.uk/guidance/applying-for-a-grant-on-credit-for-inheritance-tax

german_keeper

Marcon said:

german_keeper said:

Is this mainly an issue for people as poseidon1 quotes with the vast majority of their estate in property and presumably the IHT tax being due when the property hasn't been sold?

We may find ourselves in a position where IHT is due but the large proportion of my mum's estate will be in savings. She is fully funded under S117 and income is currently exceeding expenditure by about £30k pa. So presumably we would just pay the bill from the savings. Or is it something to do with the IHT being due before the paperwork is actually complete on the estate, which to be honest does sound bonkers.

Not really. IHT is payable six months from the death, and many estates won't be nearly ready to apply for probate by then. Also think how many people would cheerily distribute the assets and only then consider...that's why probate can't be granted until the IHT issue has been satisfactorily addressed.

See https://www.gov.uk/paying-inheritance-tax

OP, you might also like to look at that link, including https://www.gov.uk/guidance/applying-for-a-grant-on-credit-for-inheritance-tax

Thanks very much. I will have a proper read through that at a more opportune time, ie when I am not half way through a bottle of red!

We also have to consider the issue of gifts out of normal income at some point. A family friend who is a solicitor has confirmed that the circumstances fit the criteria but under POA we would have to go through the Court of Protection for approval. I am one of those strange people who would quite happily pay some IHT but I agree with my sisters and my aunts that mum would be horrified at some of her money going to the taxman rather than us 3.

Keep_pedalling

german_keeper said:

Marcon said:

german_keeper said:

Is this mainly an issue for people as poseidon1 quotes with the vast majority of their estate in property and presumably the IHT tax being due when the property hasn't been sold?

We may find ourselves in a position where IHT is due but the large proportion of my mum's estate will be in savings. She is fully funded under S117 and income is currently exceeding expenditure by about £30k pa. So presumably we would just pay the bill from the savings. Or is it something to do with the IHT being due before the paperwork is actually complete on the estate, which to be honest does sound bonkers.

Not really. IHT is payable six months from the death, and many estates won't be nearly ready to apply for probate by then. Also think how many people would cheerily distribute the assets and only then consider...that's why probate can't be granted until the IHT issue has been satisfactorily addressed.

See https://www.gov.uk/paying-inheritance-tax

OP, you might also like to look at that link, including https://www.gov.uk/guidance/applying-for-a-grant-on-credit-for-inheritance-tax

Thanks very much. I will have a proper read through that at a more opportune time, ie when I am not half way through a bottle of red!

We also have to consider the issue of gifts out of normal income at some point. A family friend who is a solicitor has confirmed that the circumstances fit the criteria but under POA we would have to go through the Court of Protection for approval. I am one of those strange people who would quite happily pay some IHT but I agree with my sisters and my aunts that mum would be horrified at some of her money going to the taxman rather than us 3.

You mean the sort of tax that is used to pay for things like her continuing care.