Justin Taurog discusses case studies that show the value of inheritance tax.
In association with
There are famously two certainties in life: death and taxes. Neither are things we like to think about much, but perhaps it's the combination of the two – inheritance tax (IHT) – to which we give the least thought.
We have long had 'stealth taxes', which are so called because they go relatively unnoticed, but IHT could be the stealthiest of all taxes. That is because a potential tax bill can grow unnoticed each year, and the final bill won't be known in your own lifetime.
Just how stealthy is IHT?
IHT is charged at a rate of 40% on the value of your client's estate that is above £325,000 for individuals unless specific exemptions apply.
For married couples, they can potentially combine these individual thresholds to £650,000 when leaving money to their dependants; so your clients might think that the threshold amounts are pretty high and that they (or rather their dependants) will not need to pay IHT.
However, for those living in London, the average house price is £463,872. Based on this alone, many will already be above the individual threshold and could have a potential IHT bill of over £45,000.
Of course, for the rest of the country, average house prices are much lower, so your clients might be forgiven for thinking that an IHT bill is not on the horizon.
But if they had £250,000 in property and other assets today, and they grow at a rate of 7% per year, then in four years' time they would have just risen above the £325,000 threshold that means they could qualify for IHT.
What does it mean for your clients?
Everyone's circumstances are different. But this shows that circumstances can change in a short space of time, and a small bill could grow very quickly into a large bill.
If your clients have dependants, then it might be worth giving some thought to how much of their hard earned money they could be left with after the tax man has taken his share.
There are also a number of things they can do to reduce their potential IHT bill, such as gifting money to their dependants during their lifetime, or taking out a whole of life insurance policy which can help offset any potential IHT bill by providing a cash lump sum on death.
The main exemptions and reliefs from IHT are:
• Spouse Exemption/Registered Civil Partners
• Gifts Out of Income
• Annual Exemption
• Business Property Relief
• Agricultural Property Relief
Outside these reliefs and exemptions, the potential to mitigate IHT is limited and mainly centred around reducing the taxable estate using gifting strategies, either outright if appropriate, or alternatively using trusts that allow greater flexibility, potential protection from third-party claims and the ability to retain a degree of control.
This may be attractive for grandparents or adults with younger children who want to put some funds aside for the future but in a flexible way. For lifetime gifting, generally after seven years the gift will fall out of account entirely for IHT purposes and after three years any IHT due on the gift starts to reduce under the tapering rules.
Justin Taurog is managing director of VitalityLife
See next page for case study >>>
British Friendly has introduced an online Adviser Toolkit to encourage income protection sales.
Zurich has launched a 'selfie' app called FaceQuote which estimates how much life cover someone might need.
The official supplement of this year's COVER Excellence Awards is available to read now as an eBook.
Child cover within critical illness plans has assumed a far greater importance in recent years, writes CIExpert's Alan Lakey.