Inheritance tax (IHT) planning is becoming an increasingly important part of the advice conversation, as more clients find their estates drawn into the tax net. While traditional strategies remain key, there is growing recognition that protection can play a valuable role in delivering more certain outcomes.
In this exclusive article, Holly Hill, Director at John Lamb Hill Oldridge, explores how protection solutions can help advisers support clients in both funding and mitigating IHT liabilities.
Inheritance tax (IHT) planning is increasingly front of mind for clients as asset values rise and thresholds remain constrained. For advisers, this creates both a challenge and an opportunity: how to help clients preserve wealth for future generations while maintaining flexibility and control during their lifetime. Protection planning—often overlooked in this context—can play a pivotal role in both funding and mitigating the impact of IHT liabilities.
The IHT Challenge
Many clients underestimate the potential scale of their IHT exposure. With the nil-rate and residence nil-rate bands frozen, and property values continuing to grow, more estates are being pulled into the IHT net. For business owners and high-net-worth individuals, the issue can be particularly acute where wealth is tied up in illiquid assets such as property or private company shares.
This creates a key risk: beneficiaries may be forced to sell assets quickly, potentially at suboptimal values, simply to meet the tax bill. Advisers therefore need strategies not only to reduce the liability, but also to ensure liquidity at the right time.
Protection as a Funding Solution
One of the most effective and straightforward ways to address an IHT liability is through life assurance. A whole-of-life policy, written in trust, can provide a tax-free lump sum on death that is specifically designed to meet the expected IHT bill.
This approach offers several advantages:
Certainty of outcome: Unlike investment-based strategies, the payout is known in advance (subject to underwriting and policy terms), giving clients peace of mind.
Speed of payment: Policies written in trust can typically pay out quickly, ensuring funds are available when needed.
Estate planning efficiency: Because the policy is held in trust, the proceeds usually fall outside of the estate for IHT purposes.
For many clients, this can be a highly cost-effective way to “insure” their IHT liability, particularly when compared to the potential erosion of wealth through tax.
Complementing Traditional Planning
Protection should not be viewed in isolation, but rather as part of a broader estate planning strategy. Advisers will often already be considering solutions such as gifting, trusts, and the use of exemptions. However, these approaches can take time to be fully effective and may involve trade-offs around access and control.
For example, potentially exempt transfers (PETs) require the donor to survive seven years for the gift to fall outside the estate. During this period, protection can be used to cover the tapering IHT liability, providing a safety net should the client die earlier than expected.
Similarly, where clients are reluctant to gift significant assets due to concerns around future financial security, protection can offer an alternative route—allowing them to retain control while still addressing the eventual tax burden.
Supporting Business Owners
Business owners present a distinct set of challenges and opportunities. While Business Relief (BR) can significantly reduce IHT exposure, eligibility is not guaranteed and may change over time. Additionally, not all business assets qualify, and reliance on reliefs alone can introduce uncertainty.
Protection can provide a valuable backstop in these scenarios. For instance, a life policy can be structured to cover any residual IHT liability or to provide liquidity without disrupting the business. This can be particularly important where succession planning involves passing the business to the next generation, who may not have the resources to fund a tax bill.
Enhancing Client Conversations
Introducing protection into IHT discussions can also help advisers reframe conversations with clients. Rather than focusing solely on tax mitigation, the emphasis shifts to outcomes: ensuring that beneficiaries receive the intended legacy, without compromise.
This can be especially powerful for clients who are emotionally attached to specific assets, such as the family home or a long-held business. Protection provides a practical solution that aligns with these priorities, reducing the likelihood of forced sales.
Moreover, it can make planning more accessible. Not all clients are comfortable with complex trust structures or significant lifetime gifting. A well-structured protection policy is often easier to understand and implement, making it an attractive option for a wider range of clients.
The Role of Trusts
The effectiveness of protection in IHT planning is closely linked to the use of trusts. Writing policies in trust ensures that proceeds are paid to the intended beneficiaries without forming part of the estate. It also allows for greater control over how funds are distributed.
Advisers should work closely with clients to ensure that trust arrangements are aligned with their wider estate planning objectives, including considerations around trustees, beneficiaries, and potential changes in circumstances.
A Holistic Approach
Ultimately, protection is not a substitute for comprehensive estate planning, but it is a powerful complement. By combining protection with other strategies, advisers can deliver more robust and resilient outcomes for clients.
In an environment of ongoing legislative uncertainty and evolving client needs, flexibility is key. Protection offers a way to manage risk, provide certainty, and ensure that plans remain effective even as circumstances change.
Conclusion
As IHT continues to impact a growing number of clients, advisers must look beyond traditional planning tools. Protection provides a practical, flexible, and client-friendly solution to both fund and mitigate the impact of inheritance tax liabilities.
By integrating protection into the advice process, firms like John Lamb Hill Oldridge can help clients safeguard their legacy, protect their families, and achieve greater confidence in their long-term financial plans.
