With the Government confirming yesterday that pension savings will be brought inside the inheritance tax (IHT) net from April 2027, more people’s estates are set to be subject to an IHT bill on their death, potentially leaving loved ones with a significantly higher tax bill.
Tony Müdd, Third Party Products and Services Director at St. James’s Place outlines how specialist life insurance cover can protect from a potential IHT liability: “In light of the changes initially announced in the Autumn Budget and confirmed yesterday – and with rising estate values, many families are seeking solutions to minimise future IHT costs. Gift Inter Vivos (GIV) insurance – a specialist form of term life cover designed to help individuals protect their loved ones from a potential IHT liability on money or assets gifted during their lifetime – is one way of doing this, and is becoming increasingly popular.
“A GIV policy is typically suitable where a substantial financial gift has been made and the recipient may not have the funds to pay the IHT if the donor passes away within seven years. The policy is written on the life of the person making the gift, with the amount of cover reducing over the term of the policy to match the reducing IHT liability due to taper relief. GIV insurance policies typically last for seven years, mirroring the IHT taper period although short terms can be used in respect of gifts given previously within a seven-year period.
“We’ve seen website views for GIV cover double among financial advisers compared with the same period last year, as it becomes a more widely used estate planning tool. It suits those who are looking to make meaningful gifts during their lifetime without burdening their beneficiaries, ensuring that generous acts don’t result in unintended consequences – and providing clarity and peace of mind for individuals who want to pass on wealth in a tax-efficient way.
“More individuals are taking proactive steps to manage their legacy and protect their families from unforeseen tax burdens – and GIV insurance can provide a simple and effective solution for covering potential tax liabilities that could otherwise fall on loved ones unexpectedly. There are a number of elements to bear in mind if you’re considering GIV cover, however, such as the importance of writing the policy in trust to the recipient of the gift on whom the IHT liability will fall and getting the level of cover for each year correct. It’s worth seeking professional advice before agreeing to a policy, so that you are adequately covered.”
Tony Müdd’s top tips when taking out Gift Inter Vivos cover to reduce IHT burden:
- Make sure to use a trust: GIV policies must be written into trust, otherwise the proceeds themselves could become part of the estate and be subject to IHT. The proceeds of your policy will then be paid directly to your beneficiaries rather than your estate, avoiding IHT.
- Ensure you have a 7-year policy: Your policy should normally be for seven years as this aligns with the potentially exempt nature of the gift. However, there is nothing to stop you doing a six-year policy for a gift made a year ago. Also, if the gift is below the nil rate band (£325,000) a level cover policy will be more appropriate as taper relief will not apply.
- Cost of GIV cover will vary: This is depending on a range of factors, from an individual’s age, health, and the value of the gift to be insured so make sure you’re clear on what you are required to pay.
- Multiple policies for multiple gifts: For multiple lifetime gifts, separate policies may be needed to match each gift’s timing and value.
- Keep clear records and review the policy: Remember to keep clear records of the gift, the existence of the policy and trust. Most of all keep a record of premiums paid as although these are themselves treated as annual gifts they should fall within the ‘Gifts out of income exemption’. An exemption that can only be claimed by executors on the donor’s death.
