Life assurance and IHT

My_perfect_cousin

If a person gifted cash to an adult child less than 7 years earlier (not excess out of surplus income or £3000) and then the person opted to change their life assurance so that payment on their death would be made to their adult child rather than their wife or added into their estate, how would this impact on potential IHT?

Would it be:

A) Providing the person survived for 7 years after making the cash gift and making the change of beneficiary  of their life assurance payment IHT would not be due on either or

As the life assurance change was made at a time when the person had already made a cash payment, there would be a potential IHT charge. Potentially something like... if the value of the life assurance and the value of the gift exceeded the person's IHT threshold or

something else

TIA 

Keep_pedalling

The two things are not related. Life insurance will fall out of your estate providing it is written in trust. If it is not written in trust then changing the beneficiary from a spouse to someone else could result in an IHT bill as the payment is no longer covered by spousal exemption. 

SVaz

You have life cover written in trust and anyone can be a beneficiary.  

It’s never within your Estate for any kind of tax purpose. 

The amount of people who don’t know this is staggering when I’ve asked them. 

Marcon

SVaz said:

You have life cover written in trust and anyone can be a beneficiary.  

It’s never within your Estate for any kind of tax purpose. 

Problem is that not all life cover IS written in trust...

SVaz said:

The amount of people who don’t know this is staggering when I’ve asked them. 

How many have you asked, for goodness sake? Probably not an everyday conversation for most people!

SVaz

Life insurance companies now make it very clear that you should think about having it written in trust.  They did 5 years ago when we redid ours.
They did last year when our Daughter sorted out extra cover as her death in service payment would only pay off half the mortgage. 

They even send you the paperwork but people obviously can’t be arsed. 

My_perfect_cousin

Keep_pedalling said:

The two things are not related. Life insurance will fall out of your estate providing it is written in trust. If it is not written in trust then changing the beneficiary from a spouse to someone else could result in an IHT bill as the payment is no longer covered by spousal exemption. 

Thanks as always. If it is a joint life (ie both lives) policy would it be advantageous to put it in trust to the adult child? Would such a change move it out of both estates and not attract IHT? 

Albermarle

This is not an area I am familiar with, but I presume if you take out life assurance for a considerable sum when you are older, the annual premiums will be pretty large.
So if you then live for another 30 years you will presumably have paid out more than your beneficiary would get back, somewhat reducing any possible IHT benefit.

I know that there is always a strong possibility with any insurance that you will pay out more in premiums than you will get back. However with car, house, travel and even life assurance for younger people, it makes sense to insure against potential disaster, even if it is likely to never be needed.
However taking out life assurance as a way of avoiding IHT, and then potentially forking out a lot more in premiums than you could well get back, seems to be a potential downside to the strategy. 
Unless I have missed something, which is very possible.

poseidon1

My_perfect_cousin said:

Keep_pedalling said:

The two things are not related. Life insurance will fall out of your estate providing it is written in trust. If it is not written in trust then changing the beneficiary from a spouse to someone else could result in an IHT bill as the payment is no longer covered by spousal exemption. 

Thanks as always. If it is a joint life (ie both lives) policy would it be advantageous to put it in trust to the adult child? Would such a change move it out of both estates and not attract IHT? 

In the situation you outline, it must normally make sense for the policy to be written in trust for the beneficiary or beneficiaries concerned to ensure the proceeds:

1) Fall out side the estate for IHT purposes
2) Are quickly accessible without having to wait for probate,

However  if it is a joint life policy payable on 2nd death and provides permanent cover irrespective of when death occurs ( ie it is a whole of life policy), then failing to place in trust from outset may mean any future transfer to trust might trigger a potentially exempt transfer  ( PET) - see below a discussion of this 

https://trustsdiscussionforum.co.uk/t/transfer-a-lift-insurance-policy-into-trust-or-assign/14746


The value of the PET will be the surrender value of the policy at the date the gift into trust was made so the earlier this is done from policy inception,  the better.   Helpfully qualifying life policies in trust are exempt from the HMRC registration process.

Incidentally if there is only a single child ( rather than children) there is always the option of an outright assignment of ownership of the policy to the child, also discussed in the link above. 

My_perfect_cousin

My question relates to situation where a couple have a joint life insurance policy payable on each death. The policy is not in trust. The couple have each gifted cash to their sole adult child within the past 7 years.

If each of the couple wanted to place the life insurance policy in trust so that their adult child became the beneficiary on each of their deaths,  would there be a charge if the payout value of the policy for each person at the date of putting it in trust plus the cash gift given in the past 7 years exceeded the person's IHT allowance?  

Also, which type of expert would be the best to contact for professional advice? 

TIA

Marcon

My_perfect_cousin said:

My question relates to situation where a couple have a joint life insurance policy payable on each death. The policy is not in trust. The couple have each gifted cash to their sole adult child within the past 7 years.

If each of the couple wanted to place the life insurance policy in trust so that their adult child became the beneficiary on each of their deaths,  would there be a charge if the payout value of the policy for each person at the date of putting it in trust plus the cash gift given in the past 7 years exceeded the person's IHT allowance?  

Also, which type of expert would be the best to contact for professional advice? 

TIA

I've asked for this to be merged with the same question you asked recently: https://forums.moneysavingexpert.com/discussion/6592103/life-assurance-and-iht#latest

For a suitable adviser, please see https://www.step.org/about-step/public

MSE_ForumTeam5

We've merged the threads as suggested