Ian Smart, product architect at Royal London, says he would like to see some recognition for long-term partners. “It is unfair that the amount of tax someone pays comes down to whether they sign a legal registrar,” he says.
“Unmarried couples also miss out when the rules of intestacy apply. It would make sense to recognise these relationships, perhaps setting a time limit, after which they would qualify for the same exemptions as married couples.”
Planning with protection
Whether unmarried or facing a large liability, clients can find protection has a valuable part to play in IHT-planning strategies. Although a life insurance policy does not reduce a future liability, it can be used to cover a future IHT bill.
For example, if a married couple have an estate worth £900,000, and cannot use the RNRB as they have no children to leave their home to, they could take out a whole of life policy for £100,000 to cover the potential IHT charge.
These policies are available up to age 85 and, providing the premiums are maintained, will guarantee a payment on death. The sum insured can be adjusted if a future liability grows, with many including an option to increase cover without further underwriting.
Two different types of plan are available. The more popular is the guaranteed acceptance plan, which requires no medical underwriting and is typically sold direct, while fully underwritten policies are more common in the adviser market and can be arranged for much larger sums insured.
Although providing medical information can result in lower premiums for clients in good health, insurers are recognising the need for guaranteed acceptance plans in the adviser market. For example, last November, AIG Life launched its Over Fifties Life Plan, allowing advisers to arrange up to £15,000 of cover for their clients without any underwriting.
Matter of trust
With both types of plan, it is also important to ensure they do not inadvertently add to a future IHT problem. Placing a life insurance policy in trust ensures that, rather than being paid into the deceased’s estate and potentially increasing an IHT liability, the proceeds are paid directly to a nominated beneficiary.
This can save a considerable amount of tax. As an example, take a life insurance payout of £300,000. If this were paid directly into the deceased’s estate, and assuming their other assets exceed the nil-rate band, this payout could generate an additional IHT liability of £120,000.
There are also additional benefits of using a trust. “By writing a life insurance policy in trust, policyholders can make the sure the correct recipient gets a timely payout, without having to wait for the probate process, which can take a considerable amount of time,” says Andrew Gilbert, head of life products at LV.
