We know it can be tough to talk about Inheritance Tax (IHT) with your clients, so we’ve created a toolkit to answer all your IHT questions.

IHT is a tax payable upon death or a transfer of assets on certain lifetime gifts. It’s traditionally seen as a tax for the wealthy and many assume it doesn’t apply to them. But more and more people are falling into the IHT net.

Find articles, guides and tools to help you with inheritance tax planning, plus podcasts for listening on the go and CPD material.

The benefits of using protection for IHT planning

  • Certainty of cost

    Guaranteed rates mean certainty of cost and certainty of money being available to pay the tax bill.

  • Certainty of access

    Setting the plan up under a suitable trust (such as Discretionary Trust) means speed of pay-out on death as the sum assured is available to the trustees without having to wait for probate (confirmation in Scotland) to be granted. This allows the IHT bill to be settled quickly, allowing the estate to be distributed without delay.

  • Certainty of outcome

    As the sum assured is guaranteed to pay out on death.

  • Tax efficient

    The arrangement is tax efficient as the money is taken outside the client’s estate and does not form part of it.

Podcasts: Our experts discuss inheritance tax planning

IHT - Relationship with Discretionary Trusts and term Assurance

Listen to Shelley Read and Gregor Sked from our Intermediary Development and Technical team as they look at IHT with regards to trusts and in particular why trusts should be considered in connection with life policies.

Shelley: Hello and welcome to this week’ 5-minute protection download. I’m Shelley Read, and joining me today is Gregor Sked. In this episode  we’re going to look at IHT with regard to trusts and in particular how trusts work around life policies.

But before we start talking about IHT, Gregor, can you just remind us why would we even consider putting a protection policy in trust

Gregor: Well, there are a few reasons and I think this is summarised really well but one of my favourite industry slogans, right money, right hands, right time. Basically this means that by putting a life policy in trust and taking any proceeds outside of their estate you can ensure the money goes to the right beneficiaries, that any probate delays can be avoided and the trustees can get hold of the money quickly and release the estate for the beneficiaries…and right money meaning that placing a plan in trust will mitigate any IHT payable, which we will look at in a little more detail in just a while. 

Shelley: Thanks Gregor, so why would we use a trust in connection with a life policy and which trusts are most popular? 

Gregor: Well, as I just mentioned, trusts can be used to reduce or mitigate your IHT liability by transferring assets progressively out of your estate. As I’m sure you’re aware there are several different types of trust, but the ones we are particularly concerned with in our world are discretionary trusts. 

Shelley: Ok, so what does a discretionary trust entail?

 Gregor: Well, Discretionary trusts are the type of trust where you can change who the trustees and most importantly who the beneficiaries are going to be, but ultimately who gets paid is at the discretion of the trustees. So you see you need to make sure your chosen trustees are trusted, hence the name, and that you instruct them, quite often with a letter of wishes, who you intend the policy proceeds to be paid to. And of course, that can be changed if required. 

It’s also important to be aware that as of 22 March 2006, when a protection policy is written into trust (other than a bare trust) there are three main charges that apply. 

Shelley: that’s right, Gregor. first of all there is an entry charge, which is taxed at 20%, now this is simple when you’re putting  something into a trust with a tangible value, such as a lump sum of money, but if you think about it life policies have no value until you die…. There’s a promise there but no actual tangible value. So generally, there will be no entry charge. 

Discretionary trusts also have something called a periodic charge, so every 10 years since the policy was put into trust HMRC will assess the value of the trust to see if there is any tax due, and I believe this to be calculated at 6%. But pure protection term policies, they’re unlikely to have a value at a 10-year anniversary so nothing to worry about again her. The only time a policy like this would have a value is if you’re in ill health at the 10 or 20 year point and the policy could have a value on the 2nd hand market, or if the policy has paid out and the proceeds were still sitting in the trust at the 10 year anniversaries, then you may get caught with a periodic charge. 

And finally,the exit charge and this is only payable if there has been an entry or periodic charge, so again it’s likely to be NIL. 

So, hopefully this has provided some more clarity on the relationship that discretionary trusts with term assurance policies and how they fit within your conversations with clients who are estate planning.

All that’s left for me to say is thanks for joining me today Gregor and thank you for listening at home or wherever you are, and don’t forget to listen out for another 5-minute protection download podcast coming your way soon.

IHT planning using Whole of Life plans

In this webinar, Adrian Bates and David Dawson, Corporate and Estate Planning Specialists, look at ways to strengthen your IHT planning conversations and demonstrate the value of Whole of Life plans.

Earn 30 minutes of CPD