Funding Inheritance Tax
Inheritance Tax (IHT) is frequently called a “voluntary tax” because in theory it should be possible to arrange your financial affairs in such a way so that your heirs can avoid having to pay any. Despite the various tools available to financial planners to help mitigate IHT, frequently, at least part of an estate will suffer tax at 40%.
In such circumstances, it may be worth looking at insurance to help ease the burden on the potential beneficiaries.
Take the example of a 70 year old woman who has more than sufficient income. If she is in good health, then it would be possible to arrange a whole-of-life policy where the sum assured is guaranteed to be paid out on her death, however long she lives, so long as the premiums are maintained. To arrange a policy that paid £100,000, which in turn could be used to settle death duties would cost circa £350 per month. Assuming she could afford to do this, would it make sense?
We have to make some bold assumptions here – but if we say that she dies when she’s 90, a total of c£84,000 will have been paid in premiums. If instead she had saved those premiums and achieved growth of say 5%, ignoring tax, her estate would have grown by £143,861. Assuming this is all subject to IHT, her beneficiaries would receive a net £86,317.
Some insurance policies will not collect premiums beyond age 90 (while maintaining the cover), so this could almost be seen as a worse case. With a guaranteed insurance policy, £100,000 would have been paid however soon death had occurred.
This approach isn’t right for everyone, and (as always) there are some further points to consider, but as a principle, insuring against the cost of IHT should not be dismissed.
If you would like to look at the cost and benefit implications do let us know.