Inheritance Tax – a growing worry for many

Nought point seven percent. Doesn’t sound much does it? That’s how much of HM Revenue & Customs’ (HMRC’s) total tax receipts in 2013/14 came from Inheritance Tax. More importantly, it’s a figure that’s growing and it’s one that worries a lot of people.

The total amount collected was actually £3,423,188,539 (and 74p!) and it was up by 9.7% on 2012/13’s figure of £3,119 million. Moreover, it was up by two thirds (67.2%) compared to 1999/2000’s figure of £2,047 million. So, the IHT tax take has gone up from two to almost three and a half billion pounds in less than a decade and a half.

In fact, trusts are one of the great undervalued benefits you get from life insurance, and insurers go to a great deal of trouble to make them both effective and simple to set up and run.

Inheritance tax, or IHT, has been called the ‘avoidable tax’ but it is clear that for many people it is becoming a growing issue, especially as parents typically want to pass on as much of their estate as possible to their children and grandchildren. For some, the very idea of paying 40% tax on assets that have already been taxed in various ways will cause steam to come out of their ears (note to compliance officers – I’m not suggesting this actually happens; it’s just a figure of speech…).

It is also a tax where, the more your estate is worth, the more IHT your estate will pay. Everything in your estate above the current nil rate threshold is taxed at 40% unless you leave it to your spouse or civil partner. There are ways in which your assets can be moved out of your estate but, for many people, there is another very simple way to minimise the eventual estate IHT bill. It is by creating assets outside the estate and so out of the clutches of IHT and one of the easiest ways to do that is through a whole of life insurance policy with guaranteed premiums, using a suitable trust.

These days, a discretionary trust is usually used for such arrangements, and all the necessary documentation and guidance is provided free of charge by most life insurers. In fact, trusts are one of the great undervalued benefits you get from life insurance, and insurers go to a great deal of trouble to make them both effective and simple to set up and run.

One downside of using a discretionary trust is that it leads to a possible periodic charge to IHT based on the value of the policy at the time. To help prevent that, many insurers now offer whole of life policies with no surrender value, which avoids the periodic charge as the policy has no value (usually unless the client is on their deathbed). In turn, the money that saves the insurer is passed on in the form of lower premiums than if a surrender value were available. As this is a whole of life solution to a whole of life problem, the value of having a surrender value is low anyway.

The reason for mentioning this solution now, apart from the news that HMRC is starting to collect more IHT again, is threefold:

  1. First, we can expect the IHT tax take to rise faster in future. That is partly because the current nil rate threshold of £325,000 per person has been frozen until 2018. It is also partly because many people’s estates are made up largely of the home they own and, after the financial troubles from 2007 and the consequent falls in values, house prices are now rising again and are expected to go on rising faster than inflation in the short term. So, more estates will find themselves subject to IHT in future.

    Recent rsearch by the Institute of Fiscal Studies (IFS) estimates that the number of estates paying IHT will rise from 2.6% in 2009/10 to 10% in 2018/19.
  2. Second, new MMR (Mortgage Market Review) rules mean getting on the housing ladder will be harder for many younger people. The idea of passing on as much of one’s estate as one can to adult children or even grandchildren could therefore increase in popularity.
  3. Sales of whole life plans actually fell in 2013, according to ABI data, from 586,000 in 2012 to 491,000 in 2013. Most of those were guaranteed acceptance (funeral) type plans, often sold direct to consumers. Under 40,000 new underwritten whole of life plans were sold by IFAs and restricted advice intermediaries. This means the market is far from saturated, and that itself creates an opportunity.

To conclude, more estates can expect to pay IHT in future, more parents will probably want to pass on more of their estate to their children and the market for a simple solution based around well-established simple whole of life protection insurance policies is one that should start to be more attractive to many intermediaries.

IHT may be the forgotten tax for many people, but it is also a stealth tax. It is usually only payable once we have passed on and many people who would never consider themselves rich will be subject to the tax, or rather, their estate will. Putting it in perspective, if you have more than two or three beneficiaries, you could find that the biggest beneficiary when you die is not any of your children or grandchildren, but the State. Is that what you want? If not, life insurance can be a simple and affordable way to do something about it.

About Andy Couchman

Andy Couchman is one of the leading commentators and consultants on health and protection insurance and mortgages in the UK. Andy is also co-chairman of Protection Review, working with fellow co-chairman Peter Le Beau MBE and CEO Kevin Carr.

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Or write to Andy Couchman, Bank House Communications Limited, Bank House, Great Rissington, Cheltenham, Gloucestershire, GL54 2LP.