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  • Tax

    Insurance to cover inheritance tax

    Spoke to a financial advisor recently who suggested that to cover my inheritance tax I could consider an insurance policy which would pay out when I pop my clogs to cover my inheritance tax bill which apparently needs to be paid before my assets are sold.  I was surprised at how much inheritance tax was going to be and wondered what people thought of this approach.

    We also discussed the option to sign over mort free houses to family as long as I live for another 7 years.  I am planning on living for a good few years but thinking it is wise to consider this

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    Hi there. I’ve been looking into this recently as I lost my husband aged 49 2 years ago. He’d built up a small portfolio and wants my girls to inherit and be looked after should something happen to me. 

    I thought about putting the houses into the girls names and hoping I live for 7 years but it’s not straightforward because then they’d be liable to be taxed on any rents coming in on top of their own salaries when they leave university. This would then make them higher tax payers and also their student loan would be higher. 

    When I looked into an insurance policy to cover the inheritance tax etc the monthly payments were extortionate
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    The IHT nil rate band is increasing where a family home is left to offspring - some small comfort.

    The obvious issues with using Whole of Life insurance to cover future IHT liabilities are

    1 - Need to overestimate liability to future proof the sum insured against rising property value

    2 - To be sure of getting accepted without an extra premium rate ( to reflect medical issues/risk factors) you need to start the policy whilst relatively young - but will/may then be paying premiums for decades (some contracts are arranged so that premiums cease at age 80 - though cover continues until demise of life insured). The base premium rate will be lower the younger one starts - but as underlying mortality rates increase by around 10% compound pa from around age 40  they about double every 7 years - so every 7 year delay in starting a WOL policy will mean  doubling in base premium for same cover amount.

    I should also state that over past 30 odd yrs there has been a significant drop in base rates for life insurance - reflecting improved mortality overall - though slimmer margins also mean tighter medical underwriting and a larger portion of applicants having medical extras applied - not just for overt disease but risk factors for later development thereof - chiefly smoking/excess weight - with smokers routinely paying sometimes double the non smoker base rate.


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    Hi and sorry to hear about the loss of our husband.  My son who is 21 has just left Uni and starts his full time work in August.  I take your comments on board re tax but my long term plan is to sell half my portfolio and have rest mortgage free.  I am on South Coast so property values high and IHT is a consideration.  I am waiting for a price on insurance but do expect it to be very high

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    Hi Jane

    You are talking about a Whole of Life (WOL) insurance policy, and whilst effective .... to ensure that you have a guaranteed premium for the rest of your life, it can be very expensive.

    I explain to my clients that resolving someone's IHT issue is a lifetimes work as there is no simple answer (unless you can afford the premiums on a WOL policy).

    Even the often quoted method of giving all your assets away and surviving 7 years means

    a. what are you going to live on for the 7 years, and the rest of your life

    b. most people aren't prepared for the loss of dignity that comes along with having nothing to pay for later life retirement and ultimately care, etc

    c. I hear people say, it's OK ... I'll get the kids to pay back some of the money I've given away and pay for care or support me - well this doesn't work as if you are still benefiting from what you've given away, then you've not really given it away (called a gift with reservation of benefit)!  So it'll still be in your estate in the eyes of HMRC and IHT due

    As you can see, doesn't really work for most people.

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    Jon Rose

    Suitable FinLife

    ** As a qualified Financial Life & Legacy Planner, and also an experienced HMO portfolio landlord (& owner of a lettings agency), I understand the financial & legacy planning issues faced by property investors & business owners, and have simple solutions to often complex problems.

    Suitable Life Planning helps people to clearly define the things you want more of in life and helps you establish the financial life plan you need to achieve them - helping you live the life you want to lead without the fear of running out of money.

    Suitable Legacy Planning empowers you to plan for & protect the people you love, leaving a lasting financial legacy that enables them to have more freedom, more choice & more life.

    Suitable Money Advice are a fully independent and impartial financial planner providing regulated financial advice & regulated financial products, if indeed you need any.  We are a SIPP & SSAS specialist

    Please get in touch on 01202 287 990 or jon.rose@suitablefinlife.co.uk

    Jon

    Are relevant life policies available for property companies?

    Deb

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    Debbie Franklin

    Director of Tax Peplows Limited

    CTA ACA FCCA

    Yes they are Debbie (max term up to age 75)

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    Jon Rose

    Suitable FinLife

    ** As a qualified Financial Life & Legacy Planner, and also an experienced HMO portfolio landlord (& owner of a lettings agency), I understand the financial & legacy planning issues faced by property investors & business owners, and have simple solutions to often complex problems.

    Suitable Life Planning helps people to clearly define the things you want more of in life and helps you establish the financial life plan you need to achieve them - helping you live the life you want to lead without the fear of running out of money.

    Suitable Legacy Planning empowers you to plan for & protect the people you love, leaving a lasting financial legacy that enables them to have more freedom, more choice & more life.

    Suitable Money Advice are a fully independent and impartial financial planner providing regulated financial advice & regulated financial products, if indeed you need any.  We are a SIPP & SSAS specialist

    Please get in touch on 01202 287 990 or jon.rose@suitablefinlife.co.uk

    There are various ways to mitigate IHT. One strategy I employ is to have as much manageable debt as possible. The key word here is ‘manageable’. This means there is a lot less exposure to IHT. In my case 75% of all the houses I own will not be liable for IHT. So only 25% of my portfolio is exposed to IHT.

    The bonus is I’ve got plenty of money to spend and give away. I’ve just got to make sure I can afford the interest payments. I intend to keep remortgaging every 5 years and keep my LTV at  75% and keep stripping money out of my portfolio.
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    I believe there is a 10 year rule with land and property

     believe it means you can pass the BTL estate to your children and they can pay back the IHT from the rent back to HMRC

    Someone has said debt is a sound way to avoid IHT

    as members know I am a great supporter of Pensions and they too can be used to avoid IHT

    Life cover is good but can be costly



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    Learn Change and Adapt ?????

    All comments are for casual information purposes only. If you wish to rely on any advice I have given please ensure you obtain independent specialist advice from a third party. No liability is accepted for comments made.


    Yes an o/s IHT bill can be paid over 10 annual instalments - but interest is charged on the o/s portion at around 3% pa (variable) which adds to total IHT payable.

    In the event that property assets on which IHT was levied are sold the whole IHT balance (with interest) becomes payable immediately.

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    IHT is a middle class tax. The rich use loop holes and the poor don't have the wealth. So what you are looking at is one of the loopholes. And before anyone shouts me down, it's a legitimate and often used way. The life assurance will be held in trust I presume and so outside of your IHT estate.

    The issue with life assurance is not whether it can pay out (we are all assured we will die at some point) but whether it's cost effective. When many of my clients start to look at IHT matters life assurance is expensive. It's relatively cheap when death is not on your radar.

    You need to weigh up the options but a policy which will be there for a long time such as WHole of Life will be expensive and you may which to consider having some investment element too for flexibility such as a low start investment policy (part life and part investment). Pensions are also useful but usually for surplus cash not illiquid assets.
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    Chartered Accountant, Tax Advisor and Mortgage broker

    (and BTL portfolio owner)

    stuart@johnsonsca.com

    02039077022