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Case Study: Using whole of life policies in IHT planning

A whole of life policy written in trust can offset the cost of IHT without reducing the insured’s access to their capital.


The problem: Some clients are approaching retirement are starting to consider methods to mitigate inheritance tax liabilities for the beneficiaries but are concerned that gifting assets may reduce their standard of living. What role can a whole of life policy play in IHT planning for them?

The solution: Statistics clearly show we are all living longer, but not necessarily in a better state of health or with better finances to go with our extended retirement.

At age 60 the average male is expected to live for a further 21.8 years and at age 70 a further 14.2 years. The baby boomers who currently represent nearly 80 per cent of the UK’s wealth are now moving towards this age range and for a large majority this will mean a mixture of equity in property and final salary or related pension benefits.

These assets and their liability to IHT can change over time but the challenge for many is whether the client can actually afford to gift assets and forego future capital or income access.

With clients living longer and many wishing to reduce or cover their potential inheritance tax bill for beneficiaries, is it preferential for them to make gifts into a trust or commit to a regular premium whole of life policy within a trust?

Clever trust arrangements such as the discount gift trusts and variants of the loan trust allow settlors to make gifts to a beneficiary and maintain access to “income” (DGT) or capital (loan trust), whilst mitigating some or all of the settlors IHT on that investment. However, for younger retirees, who have no other additional capital this may not be a viable solution as they are likely to need some or all of their original investment at some point.

For those who find themselves in this position, the traditional whole of life protection policy in trust offers an alternative solution. This option allows clients to retain capital for on-going investment and ensures a payout will be available for their beneficiaries to cover any IHT bill.

This option was very popular in the late 80’s and 90’s but fell out of favour in the 00’s as bonds in trust over took as the preferred IHT planning model. However, the development of guaranteed premium products has eliminated the investment risk associated with older, more traditional products and removed the need for periodic reviews, therefore they are coming back into favour.

Premiums are likely to be exempt from IHT because they fall within the annual exemption of £3,000 (£6,000 for a married couple) or out of the normal expenditure of income rules where no cap exists, but a requirement to prove that the standard of living of the applicants is not affected.

As advisers look to widen their client proposition and identify other areas of opportunity, reviewing IHT earlier rather than later will not only provide peace of mind but could also result in significant savings.

Consider a married couple (male aged 60, female aged 57), buying a £400,000 sum assured policy on a joint life last survivor basis on guaranteed rates could cost £380.76pm compared to £679.34pm if they were to purchase 10 years later and that is assuming they get the same underwriting decision, which may be unlikely considering that healthy life expectancy is not increasing as fast as longevity.

If the couple both died aligned to the male’s life expectance from age 60 they would have paid £98,997.60 (£380.76 x 12 x 21 years 8 months) compared to £115,129.12 (£679.34 x 12 x 14 years 2 months) from age 70.

In this instance, the clients would have saved in excess of £15,000 and enabled existing assets to be invested. They would also have continued access to their money and further peace of mind by providing funds to meet their expected IHT liability.

Phil Carroll is financial planning expert at Skandia



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