Has anyone used life assurance in trust to cover inheritance tax?

[Pushmepullu]

An independent financial adviser has advised (to a couple in their early 60s) that to mitigate the inheritance tax burden for their children, that life assurance is taken out at £300 pm. On death it will pay out £300k which is held in a trust that pays the iht. I’m struggling to see how this can possibly work. It seems so simple, so why aren’t more people aware of it?
Has anyone heard of this?

BTW, we aren’t the ones being advised.

I think it depends how much IHT they think will be due…at early 60s there is plenty of time (hopefully!) to be more tax efficient with their wealth. Are they significantly over the threshold?

Life insurance is taken out for many reasons. A person taking out life insurance may do so to help financially provide for a partner/children, to pay off the mortgage for the surviving partner, funeral costs or anything else that may defray expenses for the beneficiary (of the life insurance policy who in this case would be a beneficiary under the will). Nothing untoward here.

Incidentally, all life insurance is written in trust

It just means that the final payment of the life assurance will go to the children so they can use it to offset the tax that will be paid on the estate. We have had one for many years but at a much smaller amount which will pay 1/2 million on second death. I suppose the theory is if this 300 is spare cash they have every month do this as it leaves their estate so less to pay tax on at death. They could of course just gift money but technically there are limits on that. It's taking money out of their estate.

Circumstances are everything with these things. I would question how much kick back the advisor gets from selling the policy though - call me a skeptic! because you can mitigate exposure to inheritance tax plus there is likely to be changes in the medium term.

Just to add: given that life insurance proceeds are tax free - and depending on the couple's circumstances - it may be a tax efficient way of managing the estate and the financial burden of inheritance tax for beneficiaries. However, where a spouse inherits, no inheritance tax is payable. So this really only makes sense where the beneficiary is not a spouse

Like any insurance it is only any good if you need to claim - in this case the earlier you need to claim the better value the life insurance is.

If they live to mid 80s they'll have paid around £90k, invested over that 25 year period you'd expect it to be worth at least the £300k mentioned.

You can question the amount of any commission, of course. However, a financial adviser needs to disclose any such commission upfront

My parent did this on the advice of a IFA. It was to cover funeral expenses, IHT costs, etc. I did have to prove to HMRC that it was a 'gift out of income' or I'd have had to pay tax on it, although IHT was minimal in the end.

Not all life assurance is written in trust, as it is on my to do list to make sure that mine & DH’s is!

Yes but the point here is that the 90k invested to become 300k is now a normal part of the estate and is therefore subject to IHT itself

The life assurance policy that is in a trust is not subject to IHT as it is held outside of the estate and therefore can be used to settle the tax bill rather than adding to it

Totally legit suggestion that can work very well. It enables the parents to retain control over their asset base just now while providing some/all the means to pay the IHT on second death. As an option it’s been around for a long long time. One main thing to check is whether premiums are fixed or expected to increase later. It’s fairly well known but likely only available via an adviser, not all financial products are available direct to consumers.

But the pay out is not part of the deceased 's estate so I don't understand why you would have to do this ?

Life assurance policies that are payable directly to a persons estate are subject to IHT, so this isn’t correct

Are you sure about the numbers? They seem unlikely. We looked at it this year and the numbers just made it really poor value. The financial advisor made it look like a good deal, just by adding up the payments, but ignoring the time value of money.

If the payout is not in a trust, I.e. pays directly to a persons estate, then it becomes part of the estate and is subject to IHT.

Still, I don’t really see why gifts out of income come into it in this example

Yes I do appreciate that, but the amount of time you live after starting the life insurance makes a massive difference as to whether the life assurance is a good 'investment'. That is something you can't know in advance though.

It's a pretty standard IHT planning tool. Whether it's right for the OP depends on the circumstances. Of course a financial adviser is going to "advise" something they'll get commission on. Maybe if the OP is worried, they should consult a tax advisor - usually STEP advisers are the best option for IHT planning and other issues around retirement/end of life, etc.

Yes there has to be a beneficiary for the policy .

Yes, this can work very well, op, and it’s a well known strategy.

One caveat- the value of your estate is likely to increase even if only by inflation (and investments likely many times that) whereas your policy is for a set amount, so if you want to cover all the IHT make sure it’s high enough. Also remember that your beneficiaries may need to pay income tax as well as IHT on any pensions they inherit so think about the order in which you access your assets- your IFA should be advising on this.

My mother did this, I think when she was in her 60's. She is now 101, in a care home and her assets have dwindled tremendously - valuable brown furniture is valuable no more - but she does still have enough investments to pay for another 2 years of care. So when she dies whilst there will be no inheritance there will be this life assurance - costs £5k/year.

IHT will be taken off pensions before any money is released.

That's a good point @Molecule. You are taking assets out of the pot that is used to pay for care home fees.

It should not go to 'the children'. The executors should be the beneficairies. There is a subtle but important difference. If it goes to 'the children' and one or more do not use it to pay the inheritance tax you have a problem.

?? Not sure what you mean here. OP is planning to cover the IHT with life insurance so that will have been paid. My point is that she also needs to be thinking about income tax, but her IFA is presumably on that.

I’d be pretty sceptical about life assurance for a 101 year old costing only 5K a year - the majority of these policies have a limited age for payouts. To get one that pays out at any age would cost a fortune if only started in your 60s!
what’s going to happen if they live longer than the savings they currently have?