HELPING YOU UNDERSTANDINHERITANCE TAX PLANNING

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‘ In this world nothing is certain but death and taxes’.

Benjamin Franklin|1789

Inheritance tax (IHT) is where the two meet up. It is a tax on what you are worth (your ‘estate’) when you die.

This guide will explain what it is, how much you might have to pay, and how you could use a life assurance policy to offset the effects of IHT on what you leave after you die.

This is a complex subject, and it is important to get things right when you’re planning for IHT. Using a life assurance policy is only one solution when planning for a potential IHT liability. We recommend that you talk to your financial adviser to ensure any arrangements are suitable for your own circumstances and all your needs are met.

We regularly update our literature; you or your financial adviser can confirm that this March 2019 version is the latest by checking the literature library on our website.

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CONTENTS

What is inheritance tax? 4

What is an estate? 4

How much might you have to pay? 6

Making the most of your nil-rate bands 7

How life assurance can help 8

How Old Mutual Wealth can help 9

Putting the policy in trust 10

The importance of a will 10

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Put simply, it is the tax on your estate when you die.

Every year the Government sets a level called the ‘nil-rate band’ or NRB, below which inheritance tax does not need to be paid. For the current tax year this is £325,000* (currently frozen until 2020/21). If, when you die, you are worth more than this amount, 40% of the value of your estate above £325,000 will be due in inheritance tax (IHT). This can lead to significantly less inheritance for your loved ones.

In addition to the NRB, since 6 April 2017, if you leave your home to direct lineal descendants (children or grandchildren) an additional NRB is available referred to as the residence nil-rate band or RNRB.

For the tax year 2018/19 the RNRB is £125,000 increasing to £150,000 in 2019/20 and £175,000 in 2020/21.

* You should be aware that this amount might not be available in full where you have made gifts within the 7 years prior to death.

IHT needs to be paid within 6 months of death otherwise interest is due. The process of probate, the distribution of your assets to the beneficiaries of your will, can often take longer. Your beneficiaries could be faced with a large tax bill before they’ve received any inheritance and may be forced to sell some of their own assets or take out a loan to pay it.

With average house prices for the UK at £230,776* the prospect of paying IHT is now something that few of us can afford to ignore.

For more information, please go to: www.gov.uk/inheritance-tax

*Land Registry House Price Index, as of December 2018.

WHAT IS INHERITANCE TAX?

WHAT IS AN ESTATE?

Your estate is the sum total of what you are worth when you die. This includes your home, car, savings and investments, life assurance policies and all your other possessions.

If you are married or in a civil partnership*, you can pass your estate to your spouse or civil partner without paying IHT even if its value is more than the NRB. However, tax may be due when they die – on your estate plus theirs.* as defined by the Civil Partnership Act 2004

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Your beneficiaries could be faced with a large tax bill before they’ve received any inheritance and may be forced to sell some of their own assets or take out a loan to pay it.

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It is not possible to work out the exact amount of tax due until after you die. However, you can easily make an estimate for planning purposes.

First of all you need to work out a rough idea of what you are worth. This should include the value of:

• your home and any other property you own

• your cars, boat etc

• the contents of your home and your personal possessions

• the value of any bank or building society accounts

• your investments and savings – stocks and shares, bonds, ISAs etc

• your share in any jointly-owned assets

• any life insurance policies not in a trust (see page 10 to find out about trusts)

• any other assets

• any substantial gifts you have made during your lifetime (your financial adviser can give you more details).

HOW MUCH MIGHT YOU HAVE TO PAY?

From this total you should subtract any mortgages, loans, outstanding credit card amounts and other liabilities.

Then subtract the amount on which you do not have to pay IHT: the NRB, of £325,000 plus any RNRB you may be entitled to claim.

On any balance that is left, 40% tax will be due. This is the amount that you may wish to base your planning on.

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If you are married or in a civil partnership and you do not use up all your NRB/RNRB allowance before or when you die, you can generally pass on the unused part to your spouse or civil partner.

So, if none had been used by the first person to die, and their whole estate had passed to their spouse or civil partner with no tax payable, when the second person died there would be a NRB allowance of £650,000 plus any

applicable RNRB allowance, before IHT was payable on their estate. This transfer of the deceased’s allowances is not automatic and must be claimed by the personal representatives, for example the executors of the will, of the second person to die.

Assets Value £ Your Estate

House 650,000

Second home 250,000

Household contents 42,000

Car, boats etc 40,000

Bank/Building Society accounts 28,000

Investments 57,000

Life assurance policies (when not in trust)

200,000

Other

Total assets 1,267,000

Liabilities

Mortgage(s) 110,000

Loans, credit cards etc 2,500

Total liabilities 112,500

Value of net estate 1,154,500

Nil-rate band 900,000

Amount on which IHT is payable 254,500

Potential IHT (40%) 101,800

MAKING THE MOST OF YOUR NIL-RATE BANDS

EXAMPLE

Angela and Brian are in their early 60s when they realise that the value of all their assets, including their house, is over £1,250,000.

When the first of them dies the assets will pass to the other with no IHT. When the second of them dies IHT will be due at 40% of any assets above their combined allowance of £900,000, including the (current tax year’s) RNRB of £125,000* each.

Angela and Brian’s children are the beneficiaries of their will and will be faced with a tax bill of over £100,000.

You can see from the table (right), how Brian and Angela calculated their potential IHT liability. You can also use this table to estimate your own IHT liability.

* The unused RNRB allowance of the first to die can be transferred and claimed against the estate of the second to die, at the rate applying at the time of the second death. The transferred allowance can be claimed even if the first death occurred before the RNRB was introduced. The RNRB is only available in full for estates up to £2,000,000. Where someone has an estate above this level the RNRB is ‘tapered’, or lost, at a rate of £1 for every £2 above £2,000,000.

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A life assurance policy in a trust can give your family or the other people named in your will the cash to pay the IHT as soon as it is due. Not only does this save them a financial worry, but it means that probate (which can take some time) will usually not be further delayed.

For example, Angela and Brian, our couple from the previous page, could take out a life assurance policy with cover equivalent to the expected IHT bill.

If you are married or in a civil partnership and all your assets pass to the other person without IHT when the first of you dies, you could use an insurance policy covering both of you, which does not pay out until the second death, when the IHT may be due. This is usually cheaper than a policy taken out after the first death on the life of the survivor. So early planning has financial advantages.

When looking to insure against an IHT liability it may be best to use a life assurance policy which can last throughout your life: known as a whole of life policy.

You can choose whether the premiums for the policy are guaranteed to stay the same throughout the whole of your life, or whether they will increase on a regular basis, often known as ‘reviewable’ premiums.

The guaranteed premiums are generally higher than the initial premiums for reviewable policies, but you have the certainty they will not increase in the future.

Reviewable premiums may be lower, therefore more affordable, to start with, but you may not know by how much they will increase in the future. As you get older the increases can become larger. Depending on how long you live, a reviewable policy could cost more over the long term.

Because you do not know exactly how much IHT will have to be paid when you die, it is important that you are able to increase the cover when you need to. As you get older, it can get harder to take out life assurance, so it may be easier to increase the cover of your existing policy than to take out a new one. The best policies for IHT planning give you the option to increase your cover if the value of your assets rises, or if changes to the IHT laws mean that your potential tax liability increases.

HOW LIFE ASSURANCE CAN HELP

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Old Mutual Wealth has two different life assurance policies that are suitable for use when IHT planning, and a range of accompanying trusts – you can find out more about trusts in the following section.

GUARANTEED WHOLE LIFE – this policy will last for as long as you need it and the amount you pay for the cover is guaranteed not to change, unless you ask us to change the amount of your cover. It can cover one or two people.

ROLLING TERM – this policy can also last as long as you need it, and cover one or two people. The premiums are guaranteed for periods of ten years. At the end of each ten year period we will tell you how much the premium will be for the next ten years. The new premiums are based on your age and because you will be ten years older they will increase every ten years.

Unlike traditional reviewable policies where the increases in premium are not known when the policy is taken out, we will tell you at the start of the policy what the future increases will be – and these are guaranteed not to change, unless you change your cover.

HOW OLD MUTUAL WEALTH CAN HELP

Both policies include options to increase your cover:

ANNUAL INFLATION OPTION – you can increase your cover every year by 5% or by inflation if this is higher (measured by the Retail Prices Index), subject to a maximum of 10%. The option is included automatically and is flexible so that you can use it only when you need to, unlike other policies where it may be removed if you do not increase the cover.

GUARANTEED INCREASES OPTIONS – these options allow you to increase your cover when specific events happen in your life. These include things like getting married and increases in your salary, as well as increases in the value of your estate and changes to IHT legislation.

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The cash from a life assurance policy is usually paid into the estate of the person who has died. If this happens, the estate will increase and so will the IHT liability. You can avoid this happening by putting your policy in a suitable trust.

When you put any sort of asset including life assurance in trust, you have to appoint trustees and decide who will benefit from the trust when you die. The trustees can also be the beneficiaries. The asset becomes the legal property of the trustees, and they will give it to beneficiaries according to the legal arrangement you set up.

If you know exactly who you will want to have the assets after your death, and in what proportions, you can use a ‘bare’ or ‘absolute’ trust. This gives your assets to the people you have named, and you cannot change your mind later. The trustees will not have to pay tax on the value of the trust fund every ten years or when assets are distributed.

If you want flexibility, say to include further children or grandchildren who have yet to be born, you could use a ‘discretionary’ trust, which can allow for them. The trustees will determine which beneficiaries will benefit from the assets of the trust and when based on the terms of the trust.

Using the more flexible ‘discretionary’ trust does mean, though, that the trustees may have to pay tax on the value of the trust property. Every ten years the trust assets will be valued by the trustees, and tax might be payable if the current value of the trust assets is more than the current NRB allowance.

THE IMPORTANCE OF A WILL

Writing a will and making sure it is up-to-date is an important part of IHT planning.

Put simply, if you do not make a will, your assets will be divided according to a pattern set by law, known as the ‘intestacy rules’, which may not be how you wanted your estate to be divided. There may be a delay in settling your affairs after death, and unnecessary IHT may be due.If something changes in your life, such as getting married or divorced, you should make sure that you update your will to reflect this.Rather than leaving all your assets to your spouse or civil partner, you can leave gifts to others, for example your children. This reduces the size of the estate when the second person dies, and reduces their potential for inheritance tax but may reduce the available nil-rate band you can pass on to your spouse or partner.

PUTTING THE POLICY IN TRUST

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If you think you may have a potential inheritance tax liability you should speak to your financial adviser soon to get some advice. Planning ahead can give you peace of mind that your loved ones will receive the gifts you leave behind, without the worry of a tax bill.

www.oldmutualwealth.co.uk

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Old Mutual Wealth is the trading name of Old Mutual Wealth Limited which provides an Individual Savings Account (ISA) and Collective Investment Account (CIA) and Old Mutual Wealth Life & Pensions Limited which provides a Collective Retirement Account (CRA) and Collective Investment Bond (CIB).

Old Mutual Wealth Limited and Old Mutual Wealth Life & Pensions Limited are registered in England and Wales under numbers 1680071 and 4163431 respectively. Registered Office at Old Mutual House, Portland Terrace, Southampton SO14 7EJ, United Kingdom. Old Mutual Wealth Limited is authorised and regulated by the Financial Conduct Authority. Old Mutual Wealth Life & Pensions Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Their Financial Services register numbers are 165359 and 207977 respectively. VAT number 386 1301 59.

9681/220-0439/May 2020

This document is based on Old Mutual Wealth’s interpretation of the law and HM Revenue and Customs practice as at March 2019.

We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change.

Full details of Old Mutual Wealth’s range of protection plans and trusts are available from your financial adviser.