by Rob May, Director, Risk Assured
Recent figures from HMRC show Inheritance Tax (IHT) receipts continue to rise with record receipts in 2017/18 of £5.2 billion, an increase of eight percent year-on-year.
The likelihood of further increases will undoubtedly be driven by the April 2017 legislative changes to IHT on residential property held in offshore structures, the lack of movement in the nil rate band, and the minimal or non-existent benefit of the residence nil rate band for estates valued at more than £2 million.
With residential property accounting for 54 percent of the increase in the capital value of estates since 2009/10, if (when) the property market does regain momentum in a post-Brexit UK, clients holding residential property are likely to see a significant increase in the IHT exposure on their estate in future (particularly those with property in London).
The Office for Tax Simplification (OTS) are currently conducting a review of IHT, with the principal aim of the review being to "identify opportunities and develop recommendations for simplifying IHT from both a tax technical and an administrative standpoint."
The publication of the OTS report is due in the Autumn and, whilst any simplification of IHT (particularly the Residence Nil Rate Band) will be welcome, there is concern that the scope of the review will extend beyond administrative improvements and result in changes and additional restrictions to Agricultural Property Relief (APR) and Business Property Relief (BPR).
This all paints a rather gloomy picture for IHT planning and, taking into account other external factors i.e. media pressure following the Panama Papers and Paradise Papers document leaks, the increased transparency caused by beneficial ownership registers and, dare I say it, the looming possibility of a Labour government and a significantly less attractive tax regime that would come with that, now seems as good a time as any to keep IHT planning simple.
Whether you are advising UK resident or non-UK resident clients, life insurance (of the non-investment kind*) is a cornerstone of IHT planning. From a client's perspective, it provides a straightforward, cost-effective and, most importantly, non-contentious solution - after all, IHT is still paid and not avoided.
With access to insurers in the UK and offshore, options for cover denominated in Pound Sterling, US Dollars or Euros, and the ability to arrange cover for a specific term or on a whole of life basis, policies can be set-up to cover IHT in various scenarios.
Applications of life insurance for IHT planning:
* Universal Life Insurance (ULI) and Variable Universal Life Insurance (VUL) policies are marketed offshore as a solution for IHT planning, particularly for non-UK domicile clients with UK residential property. Such policies contain an investment element and it is advisable for clients to seek specialist professional tax advice before taking out such a policy. ULI and VUL policies have certain features which may make them unsuitable for IHT planning or less suitable than non-investment life insurance. Advice should always be sought based on individual circumstances.
Case study 1 - IHT on UK residential property (UK resident)
£100 million fixed sum cover was required to protect the IHT exposure on the client's property portfolio. Whilst property portfolio may increase in value in future, the client will make gifts to reduce the overall value of the property portfolio, and therefore the IHT exposure.
Term life insurance policies of varying lengths to reflect that gifting will be staggered throughout the client's lifetime. Policy sums can be reduced without limitation and the policies can be cancelled in full at any time, and without penalty. Premiums for the policies are guaranteed to remain the same for the full policy term and will reduce in line with any reduction in the sum assured.
|£116,700 per annum
|£270,500 per annum
|£226,900 per annum
|£641,100 per annum
The annual cost of the life insurance solution equates to 0.25% per annum of the total value of the client's property portfolio.
£4 million reducing sum cover was required to protect the IHT exposure over seven years whilst the assets remain in the client's estate following the gift. The sum was required to reduce in line with taper relief.
Term life insurance to mirror the reducing profile of the IHT exposure over seven years. Premiums for the policy are guaranteed and will reduce after three years as the sum assured reduces in line with taper relief.
|£218,700 in total
The total cost of the life insurance solution equates to 2.18% of the gift value which means that an IHT rate of 2.18% has been locked in.
£8 million sum cover was required to protect the IHT exposure on the client's property. As the property may increase in value in future, the policy sum assured needed to be increasing.
Term life insurance policy with a 20-year term and the option to increase the sum assured by 5% each policy year without further underwriting. The policy can be cancelled in full at any time, and without penalty. The premium for the policy is guaranteed to remain the same for the full policy term and will only increase if the client exercises the 5% annual increase option in the sum assured.
|£75,900 in total
The annual cost of the life insurance solution equates to 0.37% per annum of the total value of the client's property portfolio.
Can my client obtain life insurance if they are not resident in the UK?
Yes, we can arrange cover for clients that are resident in most countries in the world. There may be an additional premium charged or a maximum sum insured allowed dependent on the specific country. With some insurers, there are restrictions around who can own the life insurance policy.
Will my client need a medical examination?
Yes, in most instances. We arrange all medical examinations privately, and will cover all costs involved if it is held in the UK. If it is held outside the UK, we may ask clients to pay for the medical examination and seek reimbursement from the insurer on completion of the policy.
Can the life insurance policy be cancelled in future?
If your client's circumstances change and they no longer require the policy, they may cancel it at any time, and without penalty. This is the case for term insurance and whole of life insurance i.e. non-investment life insurance.
What happens to the premium in future if a client suffers from a medical illness or condition?
Once the life insurance policy has commenced, no future medical condition can impact on the premium that is charged.
What happens if my client moves to a different country in future?
All UK insurers will allow the life insurance policy to continue if a client moves to another country in future if premiums continue to be paid from an acceptable bank account e.g. a UK bank account.
What peace of mind do clients have that the insurer will pay a claim on death?
Insurers will usually only decline a claim under a life insurance policy where material information that the insured person is aware of (e.g. medical conditions), has not been disclosed at application. Statistics from UK insurers reflect that around 98% of life insurance claims are paid in full.
Is the policy protected against the possibility of the insurer defaulting?
Policies issued by UK insurers are covered by the Financial Services Compensation Scheme (FSCS) which covers 100% of claims where firms have been declared in default. More information here: https://www.fscs.org.uk/what-we-cover/compensation-limits/insurance-limits/
Policies issued by non-UK insurers may be covered by a similar scheme in the jurisdiction of the insurer.
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