As a result of frozen thresholds, increasing asset values and the proposed addition of pension plans into the Inheritance Tax (IHT) calculation, IHT is no longer a tax that only affects the very wealthy. Financial protection policies can help in IHT planning.
Whole of Life Planning
This is a life insurance policy that guarantees a payout whenever the insured person dies, provided premiums are kept up to date. It’s often used in IHT planning to provide a lump sum to cover the expected tax liability, ensuring beneficiaries don’t have to sell assets.
Gift Protection Policy
This type of policy is designed to cover the potential IHT liability arising from lifetime gifts that may still be taxable if the donor dies within seven years of making the gift (Potentially Exempt Transfers or PETs). The sum assured often reduces over the seven-year period, mirroring the tapering relief applied to PETs.
Term Assurance Policy
This policy provides cover for a specific period (the ‘term’). If the insured dies within this term, a lump sum is paid out. While generally less directly used for IHT due to its limited duration, it can be relevant when tied to specific IHT planning strategies with a defined timeframe.
Discounted Gift Trust Policy
This involves placing assets into a trust but retaining a right to a regular income. The value of the gift for IHT purposes is discounted to reflect the retained income. A life insurance policy, often a whole of life policy, is then taken out to cover the potential IHT liability on the discounted gift, with premiums often paid from the retained income.
