Financial advisers are seeing an increase in the number of families looking to take a form of life insurance that can help pay for some or all of an inheritance tax bill.
Some had already noticed an increase in demand for the product following Labour’s election win last July.
There was a further spike in applications following the changes to inheritance tax announced in Rachel Reeve’s maiden budget last October.
Nicholas Hyett, of investment firm Wealth Club, told the Telegraph that this represents “a bit of economic own goal” from Labour, as “instead of being invested in productive assets, creating jobs and boosting growth, money is being tied up in tax management products”.
Inheritance tax is a levy paid on assets inherited after someone dies, and is charged at 40%.
There are different exemptions and allowance depending on who is leaving the money behind, or example married couples are allowed to leave each other substantial assets, and over how long; for example grandparents can gift their children and grandchildren cash up to seven years before they die without any inheritance tax being due.
The main allowance is £325,000, and if you are leaving a property behind, £175,000 of its value is also exempt.
In December, Royal London also launched a life insurance product aimed at those wanting to protect their money from inheritance tax as demeand increased, reported FT Adviser.
Naomi Greatorex, managing director of Health Protection Solutions, told the Daily Express she had seen a 50% increase in families looking at taking out IHT-related life insurance over the last few months largely because of the expectation the Labour government would have IHT in its sights.
She said: “I expect this to increase even more this year when some of the changes come into force.”
Greatorex said the earlier life insurance was taken out, the cheaper it would be, and that 40 and 50 year olds may be able to pay as little as £60 a month.
A 60-year-old could expect to pay more, £81.55 per month, while a 65-year-old would pay £134.52 per month.
“Once you are over 70 it can go up to £234.72 per month or a 75-year-old may pay £420.53 a month.”
There were two ways life insurance policies can be written to cover an IHT bill.
It can be taken out a a whole life single life, or joint life second death policy.
What is life insurance for inheritance tax?
In order to take out this type of life insurance you will have to estimate how much your assets are likely to be when you die.
You can take out a life insurance policy for all or part of your estimated IHT bill. Then you will need to have it written in trust which will ringfence the money from your estate, that means it is not subject to inheritance tax.
You pay the monthly premiums when you are alive and when you die, the trustees, your beneficiaries, can use the proceeds to settle the IHT bill promptly.
You can take out Gift Inter vivos insurance which is a seven-year term insurance taken out by wealthy individuals who feel they may not live another seven years and want to use the 7-year rule to give their children or grandchildren cash.
This type of life insurance gets cheaper, and if the person hasn’t died at the end of the seven years, then no IHT is due anyway.
This type of insurance is also written using trust law, so the money paid out will have to be paid into a tax-free or tax-friendly trust. If it is paid into the estate it then becomes taxable so subject to inheritance tax.
Alan Lakey a protection expert and adviser added: “An estate valued at £1.5m would mean a current IHT bill of £200,000. This assumes that each spouse/civil partner has a £325,000 IHT nil rate band plus an additional £175,000 property allowance each.
“Therefore in this instance you would make an assumption of future estate inflation based on their age, likely longevity and how the estate is set up, whether it is property or even investments.”
