Inheritance Tax Planning

Funding for the liability

If the Inland Revenue allowed you to enter into an arrangement, where they would write off your IHT liability, on death, if you paid 'interest' on it, during your lifetime, would you be interested? While the Inland Revenue does not offer this facility, the same effect can be achieved using a third party, in the form of a life assurance company.

After any practical actions have been taken to reduce IHT, any remaining liability can be funded for, using a life assurance policy. The policy premiums represent the interest, while the death benefit of the policy can be used to clear the IHT bill. The policy must be written in trust, to ensure that the payout does not, itself, attract IHT. For a married couple, this would usually be set up to pay out when the second spouse died.

The rates for second death policies can be surprisingly low, for those in good health, especially if the lives assured are still in their 50s or 60s. The table below shows some approximate rates. For example, the annual cost for a 65 year old, non-smoking couple, in good health, to provide a sum of £100,000, when the second dies, would be approximately £1900 a year. Putting it another way, one of them would need to survive for over 52 years, (to age 117) before the total of contributions exceeded the amount paid to their beneficiaries. For a 55 year old couple, the equivalent figures are 100 years and age 155!

Sample annual costs for married couples as percentage of cover required.

Figures assume standard underwriting. Source: Zurich Assurance Ltd

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