Why families can struggle to pay the bill
Inheritance tax is charged on the part of an estate above the tax-free allowances. Executors often have to pay some or all of the bill before probate is granted, yet most of the estate is locked up until probate arrives. Families can end up borrowing or selling assets in a hurry.
A life policy in trust pays the trustees directly, usually within weeks of a claim being accepted. They can then lend or give that money to the estate to settle the tax.
The family home often makes up a large part of an estate. If your children would need to sell it to pay the tax, a policy can give them the chance to keep it, or at least sell it in their own time.
Whole of life cover written in trust
Term cover only pays if you die within the term, and an inheritance tax bill can arrive at any age. That is why whole of life cover is normally used for this purpose. It pays out whenever you die, as long as premiums are kept up.
The trust is essential. Without it, the payout would add to your estate and could itself be taxed, making the bill larger.
Premiums for whole of life cover can be guaranteed or reviewable. Guaranteed premiums cost more at the start but cannot rise. Reviewable premiums may go up at set review points, which matters on a policy you expect to hold for decades.
Couples and the second death
Married couples and civil partners can generally leave everything to each other free of inheritance tax. The bill usually falls when the second partner dies. A joint life second death policy pays at that moment, which often makes it the better fit.
Unmarried couples do not get this exemption, so tax may be due on the first death. Two single policies may suit them better.
Couples who have been married before should check whether either of them can inherit unused allowances from a late spouse. That can lower the bill and change the size of policy needed.
Gifts and the seven-year rule
Giving money away during your life can reduce your estate, but a gift can still count if you die within seven years. The tax on it may reduce gradually after three years.
A gift inter vivos policy covers that potential tax, with cover that falls as the seven years pass. It is a short, targeted policy that helps the person who received the gift.
- Get a professional estimate of the likely bill first
- Review the sum assured as property values change
- Check whether premiums fall within your gift allowances
How Hi Tomorrow helps with inheritance tax cover
We work from the estimate your solicitor, accountant or financial planner gives you. Then we compare whole of life and gift cover across our panel, show the cost of each and set up the right trust.
We do not give tax advice. If you have not had the bill estimated, we suggest you do that first, and we can work alongside your adviser.