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Inheritance tax and whole of life cover illustration

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Utilising whole of life insurance to mitigate an inheritance tax liability

couple taking out whole of life insurance to cover IHT liability

Thanks to a long and successful career and a wealthy first husband, Harry (who died in 1995), Pamela, 66, has amassed a significant £1.8m estate.

She has been married to Tom, 71, for the last 10 years and, between them, they have an estate valued at £2.6m, which includes a £1.2m home.

Let’s assume that they have separate Wills which leave all their assets to their four grown-up children.

Currently, if the couple were to die in the 2017 tax year, their inheritance tax (IHT) liability would look like this:

Harry: Inheritance tax liability

Estate value:

£800,000

Nil-rate band allowance

– £325,000

Main residence allowance:

– £100,000

Taxable value of estate:

£375,000

£375,000 x 40% inheritance tax

£150,000 IHT liability
Pamela: Inheritance tax liability

Estate value:

£1,800,000

Nil-rate band allowances:

– £650,000*

Main residence allowance:

– £200,000*

Taxable value of estate:

£950,000

£950,000 x 40% inheritance tax

£380,000 IHT liability
* Pamela inherited an additional nil-rate band and main residence allowance from her late husband Harry.

Important note: Having separate Wills and keeping their estates separate ensures that Tom and Pamela can make full use of their respective IHT allowances. If they had a joint Will, they would lose their main residence allowances as their joint estate is worth significantly over £2 million.

 

A solution to the inheritance tax problem

With four grown up children between them, Pamela and Tom decide to take out individual whole of life policies that match the projected inheritance tax liabilities on their respective estates.

By writing these policies in trust with their children as trustees, the proceeds will be free of any inheritance tax.

Consequently, when Pamela and Tom die, their children will be able to access these funds to pay the outstanding inheritance tax liability on the couple’s estate within the required six months.

Neil Adams

In the absence of such cover, Pamela and Tom’s children might otherwise be forced to borrow the money needed to settle the inheritance tax bill on the couple’s estate – a common occurrence in such situations.

Neil Adams
Financial Adviser at Drewberry

Considering that Pamela is now aged 66 and that Tom is 71, the best premiums for their whole of life policies would look like this:

Name

Sum assured

Monthly premium

Pamela

£380,000

£814.97

Tom

£150,000

£479.21

Provider: AIG. Based on a single life, whole of life policy.

Good interaction between client and advisor. Drew knew his brief; articulated and explained the issues clearly and answered questions fully. This all helped me clarify what I wanted and so we agreed on our action swiftly. I am a very satisfied client. Thank you.

Ronald Lofkin
25/07/2019
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