Written by Connor Tustain, Independent Financial Advisor.
Background
Mr F had spent many years building a substantial estate through careful saving, investing and property ownership. Like many people, his priority was to ensure that as much of his wealth as possible passed to his family, rather than being lost to Inheritance Tax (IHT).
Following recent changes to the IHT landscape, including the continued freeze of the available allowances and the proposed inclusion of unused pension funds forming part of the estate from April 2027, Mr F became concerned that his beneficiaries could face a significant tax liability upon his death.
Although he understood there were several ways of reducing an IHT liability, he was not comfortable giving away large sums of money during his lifetime, as he wanted to retain control of his assets and ensure they remained available should his circumstances change.
The Challenge
Much of Mr F’s wealth was tied up in investments and property that he intended to pass on to the next generation. He was concerned that, without planning, his family may be forced to sell assets in order to raise the funds required to pay an IHT bill.
His objectives were to:
- Retain ownership and control of his assets during his lifetime.
- Help ensure his beneficiaries could meet any future IHT liability.
- Preserve as much of his estate as possible for his family.
- Put in place a straightforward solution that formed part of his wider estate planning strategy.
The Solution
After discussing the available options, including lifetime gifting and other estate planning strategies, Mr F decided that a Whole of Life assurance policy best met his objectives.
A Whole of Life policy is a type of life assurance that is designed to remain in force for the rest of an individual’s life, provided the premiums continue to be paid. In return for these regular premiums, the insurer agrees to pay a guaranteed lump sum upon death.
Unlike gifting assets during lifetime, a Whole of Life policy allowed Mr F to retain ownership and control of his investments and property, ensuring they remained available should he need them in the future. Instead of reducing the size of his estate by giving away capital, he chose to use a portion of his surplus income to fund the policy premiums.
The policy was written into trust, meaning that the proceeds would not form part of Mr F’s estate for Inheritance Tax purposes. Following Mr F’s passing, this allows the lump sum to be paid directly to the trustees, who can distribute the funds to the beneficiaries without waiting for probate to be completed.
The lump sum from the policy can then be used by Mr F’s beneficiaries to pay some or all of the Inheritance Tax liability. This provides valuable liquidity at what can be a difficult time, reducing the likelihood that the family would need to sell investments, property or other valuable assets simply to raise the money needed to pay the tax.
The Outcome
Mr F was able to retain full ownership of his investments and property throughout his lifetime while putting in place a plan to help protect his family’s inheritance.
Although the Whole of Life policy does not reduce the value of his estate, it is designed to provide the liquidity needed to meet a future IHT liability. This gives his family greater financial flexibility at a difficult time and helps preserve more of the estate for future generations.
Please Note
Whole of Life assurance policies are individually underwritten. Before a policy is offered, the insurer will assess your health and lifestyle, which may involve a medical questionnaire, obtaining a report from your GP, requesting medical records or, in some cases, arranging a medical examination.
The cost of cover depends on factors such as your age, health, smoking status, lifestyle and the amount of cover required. Generally, the younger and healthier you are when you apply, the lower your premiums are likely to be. As you get older, the cost of obtaining the same level of cover typically increases.
Policies are generally available with either guaranteed or reviewable premiums. Guaranteed premiums remain fixed throughout the life of the policy, providing certainty over the cost of cover. Reviewable premiums are usually lower at the outset but may increase at future review dates, or the level of cover may reduce if the higher premium is not accepted.
Writing a policy into trust has legal and tax implications and professional advice should be taken.
As your circumstances, estate value and tax legislation may change over time, it is important to review any Whole of Life policy regularly to ensure it continues to meet your objectives. It should also be considered as part of a wider estate planning strategy alongside other options, such as gifting, trusts and tax-efficient investments, to determine the most appropriate solution for your individual circumstances.
This case study is based on a real client experience but has been anonymised and simplified for illustrative purposes. Individual circumstances differ and outcomes cannot be guaranteed.