Supporting your inheritance tax planning conversations

IHT planning using protection plans

We know that it can be tough to talk about Inheritance Tax (IHT) with your clients, but we have all the tools you need to help support these conversations.

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 that it doesn’t apply to them. But more and more people are falling into the IHT net.

We’ve created a toolkit that provides a central resource of information that’s easy to access – making it easier for you to engage your clients in the protection conversation.

The IHT facts at a glance

£325,000 the basic nil-rate band, up to which no IHT is chargeable on a deceased individual's estate

2026 The current nil-rate band thresholds will remain up to and including 2025-2026

40% The rate of IHT payable on estates over the total available nil-rate band.

6 months - the period in which the IHT bill must be paid before interest is charged.

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

A guide to IHT using menu
(PDF, 1.08mb)
By talking to your clients about IHT, you’ll have access to the trustees and the beneficiaries - potentially your next generation of clients.

A guide to IHT using WoL
(PDF, 997kb)
Give clients that are thinking about IHT the peace of mind that their families and businesses will be protected after they’re gone.

Hear from our experts


Listen to Gregor Sked and Shelley Read from our Intermediary Development and Technical team as they look at Inheritance Tax landscape in the UK just now and how your clients might start to see HMRC become the biggest beneficiary to their estate without proper planning in place. 

Gregor: Hello and welcome to this week’ 5-minute protection download. I’m Gregor Sked, and with me today is Shelley Read. In this episode, we’re going to be looking at the Inheritance Tax landscape in the UK just now and how your clients might start to see HMRC become the biggest beneficiary to their estate without proper planning in place.

So, Shelley, going back to the start for listeners today who are either brand new to the industry or not close to this particular topic, can you just give us a very quick reminder of what Inheritance Tax is?

Shelley: I think the late Chancellor Roy Jenkins, summed Inheritance Tax up perfectly back in 1986 when he said “Inheritance Tax is, broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”

While it’s an interesting perspective to take his use of the word ‘voluntary’ needs to be looked at with caution because if an IHT charge is levied then it must be paid.


Gregor: And just to add to that point, an IHT charge won’t be levied if the value of someone’s estate is less than the Nil Rate Band which is currently £325,000 and is frozen at that rate until 2026.

Shelley: That’s right, and that raises another interesting point. There has been a misconception that IHT is only a tax on the rich, but that’s not really the case these days.

 

Let’s take the average UK house price which is about £244,000. That alone eats up more than half of someone’s Nil Rate Band, and as you pointed out, with the Nil Rate Band now frozen until 2026 and if house prices continue on the trajectory we see them on at the moment then more and more people might find, what’s probably their largest asset, is taking up most of their Nil Rate Band.

 

And I should mention that in that scenario we haven’t taken into account any available Residence Nil Rate Band, currently £175,000 and also frozen until 2026, which is available for some people where the main family home is being passed onto a direct descendant.

Gregor: And looking at just how much tax might be liable on an estate which exceeds the available Nil Rate Band and any available Residence Nil Rate Band, well, it’s not an insignificant amount of money is it?

Shelley: You’re right; let’s assume a client has only got their Nil Rate Band of £325,000 and an estate valued at £500,000. £175,000 is the amount that’s taxable at 40% meaning there’s a £70,000 IHT bill to be paid.

Gregor: And when it comes to paying the bill, I think it can often be overlooked that an IHT bill must be paid by the end of the sixth month after the person died otherwise HMRC will start to charge interest on top of the amount due.

Of course, there’s various strategies that can be put in place to reduce a clients IHT bill, such as gifting and ensuring clients are making the most of their allowances.

Protection policies written into trust can also make the process of accessing a sum of money to pay an IHT bill easier as the benefit paid out won’t fall into the deceased persons estate and the trustees won’t have to wait for a Grant of Probate or if you’re in Scotland a Certificate of Confirmation to get hold of the life assurance policy proceeds before they can deal with the estate.

Shelley: Remember that whoever is administering the deceased persons estate must apply for Probate or Confirmation before they can deal with the estate meaning any IHT bill must be paid first.

Gregor: As we bring this episode to a close, I wanted to look at what IHT means to HMRC, because it certainly makes up for a sizable amount of revenue for them.

Shelley: It sure does Gregor. The Office of National Statistics published some eye watering figures in 2020 showing that IHT receipts to HMRC in the 2019/20 tax year reached £5.2 billion, and even though this is a 4% decrease from the previous record breaking tax year we’re still talking serious numbers.

Gregor: Thanks Shelley, and thank you for listening at home or wherever you are.

If you’d like to hear more about how Royal London can support your estate planning conversations with clients, just get in touch with your usual Royal London contact.

And don’t forget to listen out for another 5-minute protection download podcast coming your way soon.

Source: HMRC - Inheritance Tax Statistics 2017-18


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.

Protecting a legacy webinar

In this webinar our protection specialist Adrian Bates looks at the opportunities available to you in the IHT space and how you can engage with your clients on the benefits of using regular premium life plans.

Complete the survey to earn CPD credit for watching this webinar.

We have the tools to support you

Insuring the uninsurable
(PDF,  111kb)

If your clients require joint life second death cover, but one of them is declined, what do you do?
We could still offer the joint life, last death policy you originally recommended. It’s a normal policy, with the same benefits - we’ll simply base the premium on the single life rates for the healthier life.

A simple guide to IHT
(PDF,  111kb)

This booklet tells you all you need to know about Inheritance Tax Planning and how to cover your client’s IHT liability on death with a Royal London plan. 

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.