Big enough to cope, small enough to care 
Alec Cameron 
Independent Financial Adviser 
 

Should I take out Life Insurance to protect against Inheritance Tax? 

Click on this text to edit it.Inheritance Tax is a 40% tax which is payable on your estate when you die. However, can you protect your beneficiaries against paying this higher rate of tax though a Life Insurance policy? 
 
The answer is YES you can! 

What is Inheritance Tax? 

Inheritance Tax is a tax the government takes from your estate when you die. It won’t be paid by your partner, civil or married, but it will be paid by your heirs on the value of your estate over £325,000. This is known as the nil-rate band (NRB). 

What makes up your estate? 

What is included in the value of your estate will be any jewellery, cars, property, money, and any pay-outs from life insurance policies. 

Check if your estate qualifies for the Residence Nil-rate-band (RNRB) 

Click on this text to edit it.The estate may be entitled to additional relief. Up to at least 2026, if you owned your own home or a share of it and are leaving the property to your direct descendants, there may be an additional £175,000 nil rate band. In addition to the standard nil-rate band of £325,000, this would take the tax-free allowance up to £500,000 per individual. This is only allowed on one home and is capped at £2million of assets, after which the allowance is tapered away. The residence nil rate band will be reduced by £1 for every £2 that the deceased's net estate exceeds £2m. This means there will be no RNRB available at all if the deceased holds assets of more than £2.35m. 

How do I value my estate? 

Click on this text to edit it.The way to value your estate is to review the value of any assets that you own and then take of any outstanding debts. e.g. if you had a remaining mortgage on your house, or a loan against your home. 
Check on bank overdrafts, credit cards, funeral costs. HMRC can go back as far as 20 years on unpaid inheritance tax, so keep records if you can. 

Will I need to apply for probate? 

You may need to apply for probate, check here first to see if probate is required. 
Once you have established if probate is needed, there is a process that needs to be followed. Here is a good approach to the process involved in getting through probate 

Can I avoid inheritance tax if I give away my estate to my children before I die? 

Click on this text to edit it.There are rules on how much you can gift so it is always worth checking with a financial advisor, but you must live for 7 years after you have gifted to avoid the tax implications. 
 
There are additional ways to avoid paying inheritance tax on your property, these include: 
• Donating 10% to a charity. This reduces the rate from 40% to 36%. 
• Leaving your estate to your civil partner or your spouse 
• Making a £3000 gift each year 
• Equity release 
• Taking out a life insurance policy to pay the inheritance tax. You need to do this when you are fit and healthy to avoid hefty premiums. 

How would a life insurance policy pay my inheritance tax liability? 

It is always advisable to speak to an independent financial adviser to ensure you are getting good quality advice and they will advise you on the most tax efficient way to set up the policy. 
If you have set up a whole–life-insurance policy (the premiums have been paid and are up to date) and the policy was written in Trust, the policy will pay a capital sum direct to your beneficiaries to ideally settle the IHT bill. Your beneficiaries should then inherit your estate intact as you would wish. 

Who must pay the inheritance tax? 

Click on this text to edit it.If you have left a will, then your executor or executors are responsible for making the payment. If you haven’t made a will, then the administrator of the estate will have to make the arrangements. 
This payment should be made from the cash held in the estate or from the sale of assets. 
IHT must be paid within 6 months after the persons death, if this deadline is missed HMRC can charge interest on the outstanding amount. 

Inheritance Tax planning should be part of the discussions you have with your financial advisor. 

If you don’t have these plans in place book a no obligation appointment for some initial advice here. 

 
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