Sadly, a large number of people in the UK will never have to worry about inheritance tax because of the Government threshold. I mean that in the sense that it would be nice if we were all in a position to need advice on the matter!
From the 6th of April 2009 this threshold became £325,000 per person.
If a person dies with assets valued at above £325,000 then tax is charged on the amount above the £325,000 figure.
i.e. Mr. A. dies with:
House – £200,000
Savings – £100,000
Shares – £50,000
Total – £350,000
Minus the threshold amount – £350,000 – £325,000 = £25,000
Tax would be charged at 40% on the £25,000 – £25,000 x 40% = £10,000
But if Mr. A still has a mortgage of say, £100,000 then the total value of his estate is £350,000 – £100,000 = £250,000 which is below the threshold and therefore no tax would be payable.
Now consider high net worth individuals with estates valued well over the threshold.
Mr. B has a house worth £500,000
Savings worth £200,000
Shares worth £100,000
Personal possessions worth £100,000
For some people this isn’t even scratching the surface of their true net worth but already the total is £900,000 so doing the same calculation as above:
£900,000 – £325,000 = £575,000
£575,000 x 40% = £230,000 – to the tax man.
Staggering really. That’s over 1/4 of the value of the estate that the family wont see.
It is important to remember that the above example also only really applies to single people.
Each person has a £325,000 allowance and this can be passed to the spouse or civil partner after the death of the first person.
So, Mr. B dies (again) and he has a will stating his wife get’s everything (you might want to think about leaving something to your children but Mr. B & Mrs. B never had children).
Assuming the house is entirely in Mr. B’s name that means £900,000 is coming his wifes way (hmmmm, I think we have our motive!)
Also coming his wife’s way is his inheritance tax allowance of £325,000 giving her a total allowance of £650,000
So, £900,000 – £650,000 = £250,000
£250,000 x 40% = £100,000 – to the tax man.
This is where life insurance for inheritance tax planning comes in.
A policy for £100,000 taken out on Mr. B (by Mrs. B? Surely not?) could be used to pay the inheritance tax bill.
A ‘term’ life insurance p0licy for £100,000 taken when Mr. B was 45 which was due to expire when he reached age 85 cost less than £35 per month.
If he had lived to age 85 the total he would have spent would have been £35 x 12 x 40 = £16,800
But he died age 84 so for a cost of £16,380 his wife gained £100,000.
Of course the big question is, what if Mr. B lives beyond age 85?
Well in that case the answer is a ‘whole of life’ policy.
This is where it starts to get a bit complicated.
A whole of life policy is more expensive than a ‘term assurance’ policy because provided the monthly payments are made, the policy is almost certain to pay out (always check a life insurance policy for ‘exclusions’ or any reasons why a claim may not be paid i.e. ‘non-disclosure’). A £100,000 whole-of-life policy could cost over £90 per month based on a non-smoker at age 45 which would give a total policy cost by age 85 to £43,200.
If a person takes out a whole of life policy like this at age 45 they would have to live to age 137 before the policy was worth less than they were paying for it. So it’s good value if affordable.
But what about the fact that wealth accumulates and things can be worth more over time? Well, a life insurance policy can be set up to track the Retail Price Index (RPI) so as things go up in value, so does the amount of insurance (and yes, so do the monthly payments).
There are various ways to reduce the total inheritance liability such as placing certain items or funds into a ‘trust’ or by gifting money or possessions to family members but there may still be tax implications if things are not dealt with correctly or timely.
So like most things, it is important to seek advice from a specialist or an expert.