The benefits of insuring estates against Inheritance Tax are underappreciated, but this could be the answer to distressingly large bills that many HNWI families seek.
Focus naturally falls on the family at this time of year. We are all used to insuring ourselves against life’s upsets, but what families might not know is just how useful insuring their estate against Inheritance Tax liabilities might be. John Williams, Head of Wealth Planning at Nedbank Private Wealth International, explains what you need to know in this exclusive interview.
With the country facing a COVID-19 bill of £300 billion and counting, many now see it as almost inevitable that reforms to the UK’s Inheritance Tax regime will hit the wealthy even harder. The threshold has stayed at £325,000 per person (or £650,000 per couple) since 2009, and while couples may be able to bequeath up to £1 million when passing on the family home to direct descendants, rising house prices mean ever more estates are being caught in the IHT net. HMRC figures put Surrey, where prices have surged by half in a decade, at the top of the national IHT table, with average payments of £234,000 made in 2017/18.
The fact that IHT must be paid within six months of death, whereas it typically takes a year or more to obtain the Grant of Probate necessary to complete the administration of an estate, means the issue is one of timing as well as magnitude
Many people will be worried about their family being hit by a huge IHT bill at an already very difficult time. Yet the fact that IHT must be paid within six months of death, whereas it typically takes a year or more to obtain the Grant of Probate necessary to complete the administration of an estate, means the issue is one of timing as well as magnitude.
According to John Williams, Head of Wealth Planning at Nedbank Private Wealth International, insuring against IHT liabilities may be an attractive solution on both counts.
As Williams explains, there are three main approaches (or combinations thereof) to succession planning and minimising Inheritance Tax: gifting assets (either directly or to a “control structure” such as a trust or family investment company), putting money into investments that qualify for Business Property Relief and taking out an insurance policy to cover the liability. Although the first and second options may be better known, the manifold benefits it confers means anyone concerned about IHT bills should consider insurance, he says.
Aside from being “a very simple, uncontentious solution”, Williams highlights that using insurance as an IHT management strategy has the primary beauty of allowing you to keep all of your assets in your name for your future use and benefit, rather than having to give them away.
“Second, insurance proceeds are payable before probate is granted, allowing for the prompt settlement of any bills and distribution of funds to heirs,” he continues, adding that bills can otherwise eat up a chunk of an estate. “Third, the proceeds from insurance policies aren’t liable for tax.”
So, how does insuring against IHT work?
Using insurance as an IHT management strategy has the primary beauty of allowing you to keep all of your assets in your name for your future use and benefit, rather than having to give them away
The typical set-up for using insurance in this way “would begin with the IHT liability being assessed as it stands today, which in the case of a of a married couple would be on the second death, because there is an exemption between spouses”.
“Then, a wealth adviser would consider the future liability, building in inflation before writing a policy on what is called a ‘joint last survivor basis’, so the proceeds pay out on the second death,” he explains.
The finishing touch is a trust wrapped around the insurance policy. This ensures that the proceeds are payable into a trust and remain outside the estate (otherwise the payout will be aggregated into the survivor’s estate, making the IHT exposure worse). The trustees (who may be professionally appointed) then make funds available to the beneficiaries of the estate to pay off the IHT bill. “The result is that all the family’s estate can remain intact,” says Williams.
All the talk about changes to the Inheritance Tax regime has really got our users thinking about proactive estate planning. Many people are quite surprised by how much they can do perfectly legitimately to reduce their family’s exposure, since many of the techniques wealth managers use – like insurance – are little mentioned in the press.
This risk is actually a bigger issue than one might realise. “Often people can be worth a lot on paper but their estate is quite illiquid, whether that be in property, private equity or business interests,” he observes. “What insurance does is provide that immediate liquidity you need on death and that might remove the need to sell a cherished family home.”
The appeal of insurance for those who wish to keep a family estate intact is clear. But what kind of wealthy person is usually looking at this option?
What insurance does is provide that immediate liquidity you need on death and that might remove the need to sell a cherished family home
Williams sees IHT insurance as typically appropriate for those in middle-age for whom giving away large sums either isn’t appropriate because their children are minors or where they are themselves young enough to be unsure of what their financial needs will be going forward (and thus what they can afford to give away). For such individuals, “insurance is a very simple peace of mind solution”, says Willliams.
Word is getting out, aided by structural changes helping this type of service flourish, he adds: “Over the past five years or so it’s become much more relevant to high net worth families because there is greater ability to write very high-value insurance policies. You see policies for up to £50m today.”
Of course, the wealth manager’s main work in getting this kind of solution in place lies in first identifying a need and doing the planning. However, the next steps of finding the right provider and helping write policies are also areas where wealth firms excel. As Williams explains, there are only a handful of specialist brokers working in this space and granular advice on these high-value policies is a must.
You can certainly look to insurance against both the core IHT liability and to provide protection in case the donor of gifts doesn’t survive for the seven years
It is even possible to have policies tailor made to address any outstanding IHT bills that might arise by one not quite ticking down the clock so that bequests can benefit fully from gifting rules. “You can take out insurance over the seven years to protect against the impact of the donor dying before then, which is increasingly common,” Williams points out. “You can certainly look to insurance against both the core IHT liability and to provide protection in case the donor of gifts doesn’t survive for the seven years.”
So, although insurance may not be the most palatable of purchases, it seems that insuring against your family being hit by hefty IHT bills after you are gone might very much be an exception to this rule. Why not let us arrange a no-obligation discussion with an expert in this field now? As with most things related to wealth, the early you take professional advice, the better.