View more on these topics

Cover story

Where a client makes a potentially exempt transfer, the net gift after exemptions could result in an inheritance tax charge if the donor dies within seven years of the gift.

The gift will be included in the chargeable estate on death. It is essential, therefore, that temporary life insurance cover is considered to payany additional IHT liability arising if death occurs during this period.

Taper relief may mitigate the effect of inclusion of the gift in the estate on death but it is likely that most gifts will not benefit from this relief.

This is because the relief is based on the tax payable on the gift. If the gift is covered by the nil-rate band, no tax will be payable on the gift itself so no relief will be available.

However, because it uses up some of the nil-rate band, additional tax will be payable by the balance of the estate during that time, as the example below shows.

No taper relief is available as the total of lifetime gifts was within the nil-rate band. If the donor had survived for seven years from the gift, the IHT payable on the estate would have been £110,000, 40 per cent (£509,000 – £234,000).

The additional tax payable because death occurred within seven years of the gifts is £90,000 (£200,000 – £110,000).

This is understandable as the total £225,000 gifts used up that amount of the nil-rate band so there is an additional £225,000 at the top of the estate for seven years which is assessable at 40 per cent.

The only time that taper relief will be available is where the cumulative total of gifts to the time of death exceeds the nil-rate band. When we consider that the nil-rate band is currently £234,000 and that it is generally indexed, one could argue that there are relatively few cases where taper relief will apply.

Indeed, taking into account gifts from married couples, joint gifts totalling £468,000 could currently be made by a married couple (£234,000 from each) and no taper relief would apply.

If gifts are made at different times, they will fall out of account at different times so it makes it very difficult to match the IHT liability exactly.

The tax payable in various circumstances will have to be calculated in each individual case. However, it is gener-ally advisable to marginally over-cover rather than under-cover.

General rules on cover required

Single individuals with gift

Nil-rate band – seven-year term insurance with sum assured equal to 40 per cent of gift.

Single individuals with gift

Nil-rate band – seven-year term insurance with sum assured equal to 40 per cent of nil-rate band and a seven-year IHT term insurance with sum assured equal to 40 per cent of excess over the nil-rate band. This policy remains level for three years and then reduces by 20 per cent a year.

Married individuals

Assume a half gift from each. Their part of gift, nil-rate band – seven-year term insurance with sum assured equal to 40 per cent of their part of the gift. Generally, this needs only to be on a joint-life last-death basis unless the couple have used the nil-rate band in their wills, in which case, two single life policies are necessary.

Married individuals

Assume a half gift from each. Their part of gift, nil-rate band – seven-year term insurance with sum assured equal to 40 per cent of the nil-rate band. Again, this generally needs only to be on a joint life last death basis unless the couple have used the nil-rate band in their wills, in which case, two single life policies are necessary and a seven-year IHT term insurance on each of their lives with sum assured equal to 40 per cent of excess of their part of the gift over the nil-rate band. Who should take out lifetime cover? Either the donor or the person who is liable to pay the tax should death occur within seven years. Where the donor takes out the policy, it should be written under trust for the person(s) liable to pay the tax.

Who is liable to pay the tax when a lifetime gift becomes chargeable? Generally speaking, any level term insurance policy should be taken out by the donor in trust for the beneficiaries under his will – normally a flexible power of appointment trust or a discretionary one.

The reason is that the balance of the estate is pushed up by the gift. This cover provides for the extra untapered tax payable on the balance of the estate should death occur within the seven-year period.

This policy covers the effect of gifts within the nil-rate band and the first part of bigger gifts up to that limit. Recipients of gifts do not pay tax on the element of gift within the nil-rate band. The gift does, however, affect the tax payable by the estate on the balance of the estate during the seven-year cumulation period.

Also, any IHT term insurance policy should be taken out by the donor in trust for the recipient. Alternatively, the recipient has insurable interest on the donor for this tapering policy. This cover provides for the tax actually payable on the gift. Where tax is payable, taper relief applies.

The only time the recipient of the gift has insurable interest on the donor&#39s life will be where the cumulative total is greater than the nil-rate band.

To keep it simple, the cheapest option may be to always do seven-year level term insurance. Although this may over-cover in some cases, all it means is that there is more money in the pot. I am sure it will not go to waste and it may not be any or much more expensive. Check the costs before going ahead.

Recommended

Have your cake and eat it

Split-capital investment trusts are attracting attention again. In the recent weeks, Legg-Mason Investors, Aberdeen and BFS have produced new split caps, with other companies expected to join them before the end of the year.Among these is Investec Asset Management – curr- ently designing a new European split cap to make further use of the talents […]

Sweeping changes?

What lies ahead for pension rights for same-sex partners? Last week, I moved my “sex and pension schemes” discussion on to the rights of homosexuals to receive a surviving “spouse&#39s” pension on the death of their partner.The lead case in this respect is Lisa Grant v South West Trains. Lisa is an employee of SWT, […]

Poles Apart

10 QUESTIONS THAT DEMAND ANSWERS1: What benefits can multi-ties, product ties, white labelling or dep-olarising stakeholder products bring to consumers which the current system fails to deliver?2: How much will any change cost to implement, who will pay for this change and by what method?3: What possible changes to stakeholder and Isas could be made […]

NUKI&#39S EYE

Ten years ago, the unit trust industry stood poised to rule UK financial services.Its product was relatively cheap, flexible and simple and its main rival – the life industry – was being pummelled by regulators and the media.To have won the day, unit trust companies needed only to compete hard and put the consumer interest […]

Indian market rallies as Modi's popularity strengthens

Kunal Desai, manager of the Neptune India Fund, comments on the implications of the BJP’s historic election win in India’s most populous state, Uttar Pradesh. Read the full article here Important Information – for investment professionals only. Not for retail clients.  Investment risks  The Neptune India Fund may have a high volatility rating and past […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment