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.

Molecule could pay ?

In addition we don't know when the policy was started. We started ours around 1999 and currently pay 44 a month for joint. We are both late 60s. Payout is 500k.

The current plans to tax pensions are that the tax will be removed at source before any payment is made. Maybe I'm wrong about that ?

The type of plan available 40 years ago is generally not available now. But this scenario is entirely possible with an older plan.

I think PP is talking about income tax. OP can cover the IHT with a life insurance policy in trust but if she dies over the age of 75 then her beneficiaries will still need to pay income tax on the inherited pensions (this part isn't new)- this is paid by the beneficiary at their own marginal rate when they draw the money down. So as well as taking insurance to cover the IHT OP should ideally also be thinking about spending her pension before she spends from any other sources. This can be a bit of a balancing act with her own income tax liability.

I’d be pretty sceptical about life assurance for a 101 year old costing only 5K a year

Yes if she took the policy out at 101! But she took it out at 60. These policies are whole-of-life (sometimes called joint life second death in the case of a couple).

Wow! I thought I wouldn’t get any responses! Thank you for your replies everyone. There is certainly some food for thought here. I think, in our case, finding out how much it will cost and consulting a tax expert is the best way forward.

Yes, it's a common instrument to cover tax liabilities on the second death without becoming part of the estate.

I promise you it is correct - there’s no way my sister and I would be paying out £5k on the 4th January each year if it wasn’t. She took the policy out sometime in the late 1980s.

If the money runs out we feel we have this as backup if necessary - though as the care home keep wheeling our mother out as testament to their wonderful care, we’re hoping that they will just accept LA payments as the publicity of expelling a 103 year old might not be what they want. But it does give us peace of mind.

No it isn’t, it should be but the majority never gets placed in trust so that benefit is lost.

Yes, but in their estate it would pay 40% tax, in the insurance it’s tax free.

Yes, but the key is the fact that the payments result in tax free money, but when left in the estate they are tax free. The maths only works if the estate is definitely going to pay IHT.

We do - to insure our kids wouldn’t have a massive IHT bill to pay if we were both killed in the same accident…it must be written in trust though to be outside of your estate.
As we and the kids get older we will start handing over assets/cash but they are too young for significant gifts presently.

Whilst there's an IHT benefit of the money being in a trust, the arrangement we were offered made it extremely likely we'd pay a lot more in than we'd get out. And that was without accounting for potential growth in the money.

Did you have medical loading? It’s usually break even in cash terms between 100-110 years old. I take your point about invested money, but it’s a hedge against early death too.

The break even, just based on cash in was at about 90. Making lifetime gifts out of income made much more sense. The financial advisor didn't seem particularly convincing.

Keeping it simple ALWAYS wins, you’re right.

Are people mixing up life insurance with life assurance?
Life Assurance

• Length: Lasts your whole life with no end date.
• Payout: Guaranteed because death is certain.
• Cost: Higher monthly payments.
• Use: Paying funeral costs or leaving a cash gift.

Life Insurance

• Length: Lasts a set time like 10 or 20 years.
• Payout: Only if you die during that term.
• Cost: Lower monthly payments.
• Use: Covering a home loan or raising young kids.

Would be useful if people who knew the difference and were answering the OP's question about assurance clarified the difference between the two products. I am on the first level of understanding - that they are different but I'm unclear about how they are treated from a tax perspective.

That is not ‘official’ vocabulary! It’s a nice way of summing it up, but 30 years in the industry and I’ve never come across this. Insurance and assurance are pretty much interchangeable.

Both are tax free on payment. Only taxed if gets paid to your estate and can suffer IHT, but strategies to avoid that are universal.

The “assurance” is what’s know as Whole Life policy whereas “insurance” is a term policy (or decreasing/mortgage protection). Both have there uses.

I have no desire whatsoever to increase my monthly outgoings by £300pm.
If we don't manage to spend enough of our estate by the second death, our estate will pay IHT, and I am fine with it being paid out of the estate prior to distribution and the beneficiaries will receive less.
I feel these policies are popular partly because they benefit the sellers of them as much as the holders.

They definitely pay a high commission. I think they have a place, but I’m not a fan

Thank you all.

I worry that if we do this we would be complicating our finances for our child to deal with. If both of us ended up in a care home for a number of years, there’s a possibility that iht may not apply, and we would have wasted the money we paid in. I think we need more advice for something a little simpler.

If you end up in a care home and can't afford to keep up the payments on both the policy and care home, what happens?

My guess is that if you were doing something like this, you probably have the ‘spare’ cash or assets, hence mitigating the iht liability. If however, you were in a care home and money and assets had dwindled to such a level, you would have to pay the care home bill. The life ASSURANCE payments already made will be lost as the policy pays out on death.

but you wouldn't have wasted it ? Your child will get the payout ?

Not on life assurance. If you stop paying before you die there is no payout.