Insurance trick that targets the ‘seven-year rule’ on inheritance tax
As the Government reaps record-breaking amounts of inheritance tax, inventive families are using unusual insurance policies to save thousands that would otherwise be paid in death duties.
Everyone can pass on £325,000 before IHT is due at 40pc (there is an extra allowance for family homes).
One way to mitigate IHT is to give away lump sums during your lifetime. Up to £3,000 can be gifted tax free each year. Parents also have a wedding gift allowance of £5,000. But once you have exceeded the £325,000 threshold, inheritance tax is due on a sliding scale until it falls to 0pc seven years after the gift was made.
Under the “seven-year rule”, gifts made within the three years before death attract the full 40pc rate. For gifts made more than three years prior to death taper relief applies to any tax due on a sliding scale, dropping by 8 percentage points each year until the seven-year mark is passed.
However, there is growing interest in gift insurance policies – or “gift inter vivos” plans – that pay out a lump sum to meet the IHT due if the donor dies within the seven-year window.
Rachel de Souza, of accountancy firm RSM UK, said: “The insurance does not prevent IHT being due, but it effectively compensates for the value lost by having an IHT liability.”
If a healthy 70-year-old died within three years of gifting £2.5m, then they would pay £1m in inheritance tax (assuming the £325,000 allowance had already been used up).
However, if they had gift insurance it would meet the IHT bill and cost £18,930 in premiums (£6,310 a year), according to Risk Assured, an insurance broker. While using “whole-of-life” policies to mitigate death duties is relatively well known, gift insurance is less common. Currently Aegon and LV are the only insurers to offer the policy.
The younger the customer, the lower the premiums would be. Whereas a 70-year-old would pay £6,310 in the first year for £1m of cover, an 80-year old would pay £27,921, according to Risk Assured.
Those taking out a gift insurance policy should make sure to place it in a trust, so the proceeds are not considered part of the estate, advised the broker’s Mike Strutt. However, there is a risk the premiums you pay into the trust could trigger an IHT charge if they are too large to be covered by any IHT exemptions - for example, if they are too large to be considered normal expenditure out of income.
Last year booming house prices and the continued freezing of allowances meant the Government collected £6.1bn in IHT, a record amount.
Have you found a clever way to beat inheritance tax? Let us know your tricks, email charlotte.gifford@telegraph.co.uk
