Especially when your primary aspiration is to pass on as much wealth as possible to loved ones
Inheritance Tax (IHT) planning is essential for managing your estate effectively and ensuring the wellbeing of your loved ones. Changes highlighted in last year’s Autumn Budget Statement 2024 have further emphasised this concern, with significant amendments to Business Property Relief (BPR) and Agricultural Property Relief (APR) from April 2026. Moreover, pensions previously exempted from IHT will now be subject to a 40% charge from April 2027.
Faced with these developments, the first question you should consider is, ‘What is my primary motivation?’ For many, the aim is clear – to avoid paying more tax after a lifetime of financial contributions towards building their wealth. However, the true driving force often goes deeper than mere tax avoidance. The primary aspiration is usually to pass on as much wealth as possible to loved ones.
Understanding Whole of Life Assurance
One effective, though often overlooked, solution for minimising IHT is Whole of Life Assurance, also referred to as Whole of Life cover or insurance. This type of life assurance policy is designed to pay out a guaranteed sum to your chosen beneficiaries upon your death. What sets it apart from term life insurance is its lifelong duration. While term insurance expires at the end of a specified term if the individual survives, Whole of Life policies do not have such a time limit.
It is often advisable to establish this policy within an appropriate trust. Why? By placing the policy in a trust, you ensure that the payout is excluded from your taxable estate, enabling your beneficiaries to utilise this money to cover some or all of the IHT liability. This arrangement streamlines the inheritance process while preserving the value of your estate.
What sets Whole of Life Assurance cover apart?
As you would expect, Whole of Life cover does come at a cost, typically carrying higher premiums than term-based policies. This is because it is guaranteed to pay out so long as premiums are met, unlike term policies that only pay out under specific conditions. Whether the policy is right for you depends on several factors, including your personal circumstances, the value of your estate and your estimated IHT liability.
A crucial factor to consider is your life expectancy. These policies usually provide the greatest value to individuals who live well beyond the average life expectancy, so it is essential to evaluate this aspect. This will ensure that the premiums paid over time are justified by the eventual payout your beneficiaries will receive.
Staying protected amid changing tax rules
One key advantage of Whole of Life Assurance is its independence from changing tax laws. As a standalone contract with your provider, this type of policy remains unaffected by future government budget changes. Unlike other strategies that may require selling off assets or opting for higher-risk investments, Whole of Life cover permits you to maintain control of your estate.
Another advantage is its immediate effectiveness. Aside from rare exceptions during the initial 12-month period due to factors such as suicide or self-injury, a payout is guaranteed. With other IHT strategies, achieving the same level of effectiveness may take years.
Premium considerations and tax efficiency
While premiums for Whole of Life cover may be higher, they could still fall within the annual IHT gifting exemption of £3,000 or qualify as ‘normal expenditure out of income’ if structured correctly. Indexation can also be included to adjust the sum assured for inflation, helping to keep up with the increasing value of your estate. However, it’s important to note that premiums may rise if your medical history presents certain risks.
It is crucial to approach this with a clear understanding of your options. Policies with guaranteed premiums offer the reassurance of cost stability throughout your lifetime, whereas those with adjustable premiums could lead to unforeseen expenses in the future.
Common risks and how to mitigate them
There are several matters to consider when contemplating Whole of Life cover. For instance, if the premium payments become unaffordable, you may have to cancel the policy, which does not refund any unused value. Thoughtful planning, including our comprehensive cash flow forecasting, ensures that you can assess affordability across various scenarios before committing.
Regular estate planning reviews can also help mitigate risks. As your estate’s value may grow over time, it’s essential to ensure that the Whole of Life policy aligns with your evolving goals and IHT liability.
THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.