“For high-net-worth individuals, inheritance tax planning is a crucial aspect of wealth management,” says Rob May, director of life and inheritance tax at SPF. “If you are dealing with clients that have multi-million-pound estates, and are facing a substantial 40% tax bill, it’s understandable why this tax triggers strong emotions. These people have spent their whole lives building up their wealth and paying tax as they’ve been building that wealth, only to have then to pay another 40% tax on death, or second death if a legally married couple/in a civil partnership.”
The real challenge with inheritance tax is liquidity
The key issue with inheritance tax isn’t just the amount – it’s the timing and liquidity. “There’s a lack of understanding around the mechanism involved with actually paying that tax bill.” says Rob. “Inheritance tax has to be paid within six months of death arising. And if it’s not paid within those six months, then HMRC start to apply late payment interest, which is the base rate plus 2.5%.” This creates a critical problem: your beneficiaries need to pay a substantial tax bill before they can most likely access the assets they’ve inherited. “The assets in the estate are generally frozen.” Rob explains. “Someone might say, ‘Yes, I want my kids to inherit my whole estate.’ But the kids can’t just suddenly say, ‘That property’s worth eight million, we will just sell that to pay the tax bill’”.
Life insurance is a solution to inheritance tax liquidity
Bridging this potentially large gap is where life insurance comes in. “It’s about simply using the proceeds of the policy to fund the inheritance tax bill. And crucially, being able to pay that tax bill quickly to avoid racking up late payment interest.” Depending on the client’s needs, there are different strategic options. Term insurance is life insurance over a certain time. “It works well for dealing with if, for example, a client has made a lifetime gift and when making a gift above their nil rate band allowance (£325,000), the value of the gift is exposed to inheritance tax for a period of 7 years (but with a reduction in the exposure each year between 3 and 7 years after making the gift,” says Rob. Term insurance is also valuable for clients who may implement other tax reduction strategies in the future. “Clients may not yet be in a position to make gifts but are thinking about doing so at a later stage in life, or there are other actions they might do over a certain period, such as spending the money, to help reduce the exposure to inheritance tax on their estate.”
Whole of life insurance doesn’t have an end date to it. “This means it’s a guarantee of a certain payout on death or second death,” says Rob. “It’s particularly useful with clients who are based in the UK with no plans to leave. They’ll have their main home that they live in, which isn’t the sort of asset they’d be able to easily gift during their lifetime, so they’re likely to stay living in that home until death ultimately arises.”
Beyond tax protection, whole of life insurance provides valuable certainty for clients. The premiums can be fixed, the payment schedule is predictable, and the final payout amount is guaranteed. This predictability allows clients to treat it somewhat like an investment asset. They can calculate approximately how much they’ll pay over their expected lifetime and compare it to the guaranteed payout, giving them a sense of the overall return on their premium payments.
The right time to start planning for inheritance tax
The assumption is inheritance tax is something to think about in your 50s and beyond. “But” says Rob, “I’m sometimes dealing with clients who are much younger than you’d expect for inheritance tax planning. “The younger the client is, typically the bigger the values involved, because that’s the reason why they’re thinking about all this at an earlier stage in life. Their levels of exposure to inheritance tax are substantial enough that it makes sense for them to not ignore it.”
And what about the emotional aspect of inheritance tax?
“All of us can avoid inheritance tax during our lifetimes by simply passing our wealth down to our family members,” says Rob. “But the challenge is being able to do that at a certain stage of life.” This is where life insurance plays a vital role, as it works alongside your plans to not leave you in a position where you’re gifting money too soon because you’re too young, or if you haven’t yet worked out exactly how much money you need to live on for the remainder of your life. Life insurance for inheritance tax planning isn’t about paying twice – it’s about ensuring your estate’s liquid when it matters most and preserving the full value of your assets for the next generation, while giving you the flexibility to enjoy your wealth during your lifetime.
Contact us at SPF Private Clients to see how we can help you protect your wealth.
