3 important things you need to know about estate planning and how life cover could help


By HarperLees

According to recent figures from HM Revenue & Customs (HMRC), receipts for Inheritance Tax (IHT) have risen by nearly a third when compared to 2020. It reveals the government collected £2.7 billion between April and August 2021, an increase of £0.7 billion on the amount taken during the same period in 2020.

A key reason for this, according to Professional Adviser, could be the chancellor’s decision to freeze the IHT nil-rate band (NRB) until 2026. This is the amount you’re allowed to have in your estate before it becomes liable to IHT, which is typically charged at 40%.

As property prices have risen and many investments have performed well, more people potentially face an increased IHT liability as their assets increase while the NRB stays static.

It’s not all bad news though. Thanks to the gifts you’re allowed to make, you could significantly reduce or negate an IHT liability and, if gifting isn’t an option, you could make provisions to settle the tax.

Read on to discover how you could deal with a potential IHT liability or help ensure beneficiaries do not need to use their inheritance to settle the tax charge.

1. You could have up to £1 million in assets before IHT is due

In 2021/22, your NRB threshold is £325,000 per person or £650,000 for married couples. You may also be able to claim the residence nil-rate band (RNRB), which could boost your threshold to £500,000 if you’re single or £1 million if married.

It’s also worth mentioning that you may be able to leave a pension plan to beneficiaries outside of your estate, as pensions are often not subject to IHT. This means the IHT free allowance may be more than £500,000 or £1 million.

There are strict regulations around the RNRB, so always speak with your financial planner to confirm whether you are eligible and whether your pension value can be passed to beneficiaries outside of your estate.

2. Gifting could be a good way to reduce or negate any IHT liability

One way to reduce your IHT liability is to reduce the value of your estate that’s above the NRB. If you reduce it to below the NRB, it will typically negate any IHT liability you may have.

This could be achieved by making the following gifts:

  • An annual gift of up to £3,000 given to one person or split between many.
  • An unlimited number of gifts of up to £250 each.
  • Wedding gifts of between £1,000 and £5,000.
  • Gifts made from income, which can be for any amount.

Strict rules apply to many of these gifts, so always speak to your financial planner to ensure you don’t fall foul of regulations and that making them is right for you. Please note, the above gifts are for 2021/22.

3. Potentially exempt transfers (PETs) could help reduce your estate’s value

If you have a large estate and want to make a more substantial gift, you could use a potentially exempt transfer (PET). This allows you to gift unlimited amounts to as many people as you like.

That said, you must survive for seven years after the gift is made for it to fall outside your estate. If you don’t the gift could become liable to “taper relief”, which means IHT is due at a sliding scale depending on how long you live after making the gift.

Therefore, it can be better to gift when you’re younger, as you can make more small gifts and could have a better chance of surviving the full seven years. Our recent guide to leaving an inheritance or gifting during your lifetime explains more.

Life cover could help deal with an IHT liability

In some situations, it might be more appropriate to make financial provisions that could settle an IHT liability. One way to do this might be to use life cover, which pays an amount on your death that is used to settle the tax.

Life cover could be suitable in the following situations:

  • When you wish to avoid the potential IHT liability falling upon the beneficiary if you do not survive seven years after making a PET. In this situation you may want to consider a “gift inter vivos”, which is cover that reduces in line with the taper relief. This could ensure beneficiaries don’t need use their inheritance to pay IHT if you don’t survive the required period.
  • To pre-fund the liability if you do not want to reduce your estate’s value through gifting, maybe because you want to maintain control of your wealth. In this situation a Whole of Life cover might be an option, as it means money could be paid to your beneficiaries when you die that is used to settle all, or part, of an IHT liability.

If the life cover is used to settle all of an IHT liability, beneficiaries will not have to use any of the assets you’ve left them. This means you could effectively leave more money to loved ones.

Ensure your life cover does not increase an IHT liability

According to HM Revenue and Customs, more than 6,000 estates paid IHT unnecessarily in 2018/19 because the life cover taken out to cover an IHT liability was not written in trust.

Typically, writing cover into a trust means it will not fall into your estate. If the life payment falls into your estate, it will increase the value of your estate, and potentially, increase the IHT liability.

Get in touch

Speaking with a financial planner can help ensure life cover is right for your IHT situation, and that it’s written into an appropriate trust.

If you would like to discuss life cover, gifting to deal with an IHT issue or general estate planning, please email us on info@harperlees.co.uk or call to speak with us on 01277 350560.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, or will writing.