The life assurance solution to IHT planning

An unavoidable outcome of the 2006 Finance Act is that those who wish to carry out some form of gift-based planning, while maintaining flexibility of control of beneficiaries, will face an inevitable cap on the amount they can gift to trust.

Whether a gift trust or a discounted gift trust (DGT), any gift in excess of the nil rate band will attract an immediate charge to inheritance tax (IHT) at 20%.

What then for those whose planning aspirations extend beyond the use of a nil rate band every seven years but for whom a straightforward gift or an absolute trust is a bridge too far? Might we see a return to the life assurance policy?

For clients without sufficient liquid assets, life assurance-based planning will have previously been uppermost in the planning continuum, but now it may be seen as a potentially functional tool for those whose gifts are effectively capped under the new regime.

At its basic level, one simply takes a life assurance policy to fund the IHT liability. With this course of action we have not saved any IHT and the Ex-chequer will continue to scoop a full pot on death.

Of course, this will be funded by the life policy, so for the client the insurance company has become the Exchequer - we have perhaps simply offered the client a more palatable way of parting with money.

What our industry provides are options to meet the 40% bill. When using a regular premium life assurance policy, it is a bit of a gamble - die early and you are quids in, live a long time and you will have to pay much more.

But we can offer more than this, particularly if we can control matters so as to offer broadly quantifiable premiums.

Two methods spring to mind. Firstly, a regular premium policy using 'condensed' funding. A whole of life policy is taken but premiums are paid at such a level over a certain term, say to retirement age, so that they can reduce or stop thereafter.

Secondly, a single premium policy. This can provide a simple contrast of paying £x to an insurance company today or paying £y to the Exchequer on death. Needless to say, where such policies are 'reviewable' and correlated to 'assumed' investment return, careful analysis is necessary to ensure a sensible premium basis.

Use of a single premium life policy need not stop there. Take a client who wants unfettered access to their capital and income during life.

One choice is to use some of that capital to fund the policy today, leaving the capital balance and income from it completely accessible at will. Better IHT planning than a loan trust or a DGT? Probably not, but simply a choice to suit circumstances. Take a client who wishes to leave a legacy to children or even a charity.

A single premium paid today can provide that legacy, leaving them to fritter away the rest of their money as they wish. Many more examples exist and, as we permeate into the new regime, we may expect to see the use of both regular and single premium life assurance policies for IHT planning in a number of ways.

Life assurance is not the pan- acea to all IHT ills, it's like any other form of IHT planning - just a method to be considered.

• Tweet  
• Facebook  
• LinkedIn  
• Send to