A short introduction to

INHERITANCE TAX

FACT-IHTM-0419.indd

WHOLE OF LIFE INSURANCE Often it’s impractical to reduce your estate to below the inheritance tax threshold. What really matters, though, is how much your heirs receive, rather than how much you can reduce the tax.

One option, if inheritance tax can’t be avoided, is to take out sufcient life insurance to pay the bill. The policy needs to be for the whole of your life, with the proceeds written into trust so that the money doesn’t go into your estate and get taxed. An added advantage is that the proceeds from a life insurance policy can be available quite quickly, without the need to wait for probate.

The premiums that you pay into a whole of life policy are themselves gifts that can reduce the value of your estate. The amounts paid in the seven years before death might be added back into your estate but they may be free from inheritance tax, either because they are within the annual £3,000 gifting exemption or they qualify for the normal expenditure exemption.

The main advantage of using whole of life insurance is that you can provide for your heirs while keeping your assets for your lifetime. This is a very simple way of mitigating the efect of inheritance tax, but bear in mind that asset values and taxes can change, so it’s important to review your plans regularly.

NFU Mutual has a long history of giving people expert fnancial advice.

If you would like advice on inheritance tax, investments, pensions or insurance, please contact your local agent or call us on 0800 622 323. Or email us at: fnancialplanning@nfumutual.co.uk

NFU Mutual Financial Advisers advise on NFU Mutual products and selected products from specialist providers. We will explain the advice services we ofer and our charges.

This short introduction is based on our understanding of the law and HMRC guidance as at April 2019. You should not take or refrain from taking action based on this information, without frst taking professional advice based on your own circumstances.

If you’d like this document in large print, braille or audio, just contact us.

nfumutual.co.uk

To fnd out more about how we use your personal information and your rights, please go to nfumutual.co.uk/privacy.

To stop us contacting you for marketing write to Marketing Department (Do Not Contact Me), NFU Mutual, Tiddington Road, Stratford upon Avon, WarwickshireCV37 7BJ or contact your local agency.

NFU Mutual Select Investments Limited (No. 8049488). A member of the NFU Mutual group of companies. Registered in England. Registered offce: Tiddington Road, Stratford-upon-Avon, Warwickshire CV37 7BJ.

For security and training purposes, telephone calls may be recorded and monitored.

FACT-IHTM-0419

1-2

MITIGATION In this short introduction we look at some tried and trusted methods to reduce or mitigate inheritance tax.

The frst step in inheritance tax planning is to work out how much the tax bill might be. This isn’t easy, bearing in mind the ever changing values of property and other assets, plus changing legislation. For instance, the introduction of the new residence nil rate band makes the calculation more complicated.

Even if your estate is above the nil rate band of £325,000 there might be no inheritance tax to pay, because gifts and legacies to your spouse or civil partner (if UK domiciled), and to qualifying charities and national institutions, are exempt. Please see our Short Introduction to Inheritance Tax for information on calculating the likely tax charge.

If the allowances and exemptions aren’t sufcient to eliminate inheritance tax, you’ll need to make some plans if you want to maximise how much you’ll pass on to your loved ones.

LIFETIME GIFTS Some gifts are immediately free from inheritance tax – for instance you can give away £3,000 every year tax-free. Most other gifts become free from inheritance tax if you live for seven years after making the gift.

There’s no limit to the amount you can give away. But be aware that if you give away something other than money, and it has increased in value since you acquired it, there might be a Capital Gains Tax charge.

If you make a large gift, you could take out a seven year term insurance policy for the amount of any potential tax liability. Short term life insurance is not expensive if you are in good health. The amount of insurance will usually be 40% of the gift’s value and the policy should be written into trust in favour of your heirs, so that any proceeds aren’t simply added to your estate.

Giving money away and insuring the possible tax liability for seven years is one of the simplest forms of inheritance tax planning. Although there may be no reduction to the tax payable if you die within seven years, your heirs will be compensated by the insurance policy. The efect is to pass on the full value of the gift during your lifetime.

31/03/2019 18:10

LOAN TRUSTS If you are concerned about inheritance tax but don’t yet want to make substantial gifts, one option to reduce a potential future tax bill is to use a Loan Trust. As the name suggests, they are set up by making a loan to a trust. There is no gift, so there is no immediate reduction to any possible inheritance tax charge, but any investment growth within the trust is outside your estate. The loan is interest-free and repayable on demand, so you can take money out of the trust at any time, up to the amount you originally lent (but no more). Any investment growth within the trust belongs to the trust’s benefciaries, selected by you. You can cancel the loan at any time. You might want to do this at some point in the future, if you’re sure you won’t need the capital. Writing of the loan would be a gift, which would be completely free from inheritance tax after seven years.

The Trustees The trustees are the people you name to look after the trust. It’s usual to include yourself and at least one other person. The trustees are responsible for passing the remaining money to the benefciaries after your death.

The Benefciaries The benefciaries (or benefciary) are the people you have chosen to beneft from the trust.

Inheritance Tax On death, only the value of any remaining loan is in your estate for inheritance tax. For example, if you invest £100,000 and take £60,000 in withdrawals, only £40,000 would possibly be subject to inheritance tax, even if the investment has increased in value. The appeal of a Loan Trust is that you don’t give away money that you might need in future, while capping the amount that might be liable to inheritance tax by keeping any investment growth out of your estate.

Key Risks Loan Trusts can be an efective way of reducing inheritance tax, but you need to be aware that: • The value of the investment can fall, so you

might get back less than you invest • There is no immediate reduction to potential

inheritance tax • The tax treatment depends on individual

circumstances and may change in the future.

Key Benefts • A Loan Trust can reduce a future inheritance

tax bill • You can take out the capital at any time • Any growth is not included in your estate for

inheritance tax • Only the amount of any outstanding loan is

counted as part of your estate.

DISCOUNTED GIFT SCHEMES Investment into a Discounted Gift Scheme immediately reduces the value of your estate for inheritance tax. If you live for seven years after making the investment, the whole amount is free from inheritance tax. The proviso is that you permanently lose access to the capital you invest. The money is invested into an Investment Bond and, provided there is sufcient money in the Bond, you can receive fxed regular payments for the rest of your life.

A scheme is set up by making a gift into a trust. You name the trustees and choose the benefciaries. The trust creates two separate rights:

• A right to regular payments for your lifetime

• Your benefciaries’ right to the remaining fund on your death.

Regular payments are typically set at 5% or less of the investment. If a higher fgure is selected there could be income tax to pay if, when added to your taxable income, you are in the higher rate tax bracket. There could also be income tax if the total regular payments you’ve taken exceed the original investment.

Inheritance Tax

The value of the gift for inheritance tax purposes is not the whole amount because of the right you have to future payments. This right creates the discount, the value of which depends upon:

• The amount of each the payment

• Your age

• Your health.

For instance, the right to payments of £5,000 a year from an investment of £100,000 might have a value of, say, £45,000. The £45,000 would be the discount to the total gift for inheritance tax purposes, so were you to die within seven years, only £55,000 would potentially be subject to inheritance tax. After seven years, the full amount would be outside your estate.

The younger you are, the more valuable the future payments, so the greater the discount. Your life expectancy is also a factor, so it’s necessary to provide health information when putting money into a scheme.

Key Risks

Although Discounted Gift Schemes can be an efective way of reducing inheritance tax, there are some factors you need to take into account:

• You lose access to the capital

• The value of the Investment Bond can fall, so you might get back less than you invest

• The regular payments will stop if the trust fund reduces to nil

• The tax treatment depends on individual circumstances and may change in the future.

Key Benefts

• Discounted Gift Schemes immediately reduce your potential inheritance tax

• All the money’s free from inheritance tax after seven years

• You have a right to regular payments for your lifetime.

FACT-IHTM-0419.indd 3-4 31/03/2019 18:10