Arranging Life Cover To Mitigate Any Potential IHT Liability Should A Client Die After Making A Gift
- Client in her 70s wished to give a gift of £11 million to her children
- If she died within three years of the gift, the full rate of inheritance tax would be charged
- Taper relief to apply after three years
- Life insurance with a term of eight years recommended to cover the potential liability
Clients’ circumstances
The female client was in her 70s and was both resident and domiciled in the UK.
Issues addressed
The client wished to make a gift of £11 million to her children. After using her nil rate band, the potential inheritance tax liability on the gift was calculated at more than £4 million – the size of this gift meant that there was no question of being able to use any of the available gift allowances.
The gift would have been a ‘potentially exempt transfer’, in that inheritance tax was payable were the client to pass away within seven years of making the gift. Potentially this could have left her family with a significant seven-figure sum to pay in tax.
If the client dies within three years of giving the gift, inheritance tax will be payable at 40% of the gift’s value. In the fourth year, this reduces to 32%, then it is 24% in the fifth year, 16% in the sixth and 8% in the seventh. If the client survived for more than seven years after providing the gift, then no inheritance tax would be payable.
Tailored solution provided to client by John Lamb Hill Oldridge
Our adviser recommended and arranged a life insurance policy with an initial sum insured of £4.27 million – the same as the maximum potential tax liability. It might have appeared more appropriate to arrange a policy with a seven-year term, as this is the period for which the potential tax liability lasts. However, our adviser recommended an eight-year term – this was because the liability already existed in her estate, and also because she needed to obtain professional valuations before she could make the gift. Her tax advisers also estimated that it would take about a year to sort out all the paperwork, which did indeed prove to be the case.
The sum insured would reduce after the policy had been in force for four years, in line with the reduction in the percentage rate at which IHT would be charged were the client to die in the later years.
At John Lamb Hill Oldridge, we have a comprehensive understanding of financial planning issues relating to potentially exempt transfers and other inheritance tax issues.
