Reducing UK Inheritance Tax for UK Res Doms
Life assurance
Achieves:
Can reduce IHT liability to zero.
Requires:
Preferable for younger individuals in order to minimise the cost of life assurance.
How it works:
Take out a low-cost whole-of-life policy to pay an IHT bill on your death - maybe the difference between your total estate and your nil-rate band (£255,000 in the 2003/2004 tax year).
If you and your wife suffer a fatal accident, your children could face a huge IHT bill. If you are unmarried, your partner would have to foot the bill.
When you die, the Revenue wants its money straight away or demands interest. But to pay this bill, your executors may need a loan that lasts at least until the estate is divided up among the beneficiaries. The point is that probate must be granted before the executor can distribute the estate and you can't get probate until any tax is paid.
The insurance policy must be written in trust for the beneficiaries on the lives of the husband and wife or partners to pay out on the second death. This will ensure that the proceeds fall outside the estate and are not subject to IHT.
Say a husband has an estate worth £1 million and plans to leave all to his wife. They both die in a car crash, so it goes to the children. Currently, the nil-rate band is £255,000, leaving £745,000 to the beneficiaries after a 40 per cent tax bill of £298,000.
However, instead of paying this in inheritance tax, the couple have taken out a whole-of-life policy with a death benefit equal to some or all of this potential tax bill. For a non-smoker aged 50, the annual cost of such a policy is about one per cent of cover. But costs rises steeply the older you get, especially for a single male.
You could use your annual £3,000 IHT gift exemptions to pay the premiums - that is, use your estate, not your income, to pay the bill. If you cannot afford it, consider asking your children to pay the premiums. The cost will be tiny compared to the potential tax bill, so why should they mind?