In this article, we look at how a Gift Inter-vivos policy can be used to pay any potential Inheritance Tax (IHT) liability when making an individual gift.

It is worth remembering that everyone has a nil rate band of £325,000 which is the amount of your estate on which you don’t pay any Inheritance Tax (IHT). Some people may have a higher nil rate band, for example, if they have inherited their late spouse’s nil rate band. An estate that exceeds the nil rate band is subject to IHT at 40%.

Making Individual Gifts

When you make a gift to someone else this is generally considered a Potentially Exempt Transfer (PET) and will be exempt from IHT as long as you survive for seven years after you have made the gift. If you were to die within seven years, the amount of IHT payable will reduce depending on the time period after making the gift. The sliding scale is as follows:

In the event of your death, it will be the recipient of the gift who will need to pay the IHT.

The most common way to help them pay any potential IHT liability is to take out a Gift Inter-vivos policy. This type of policy has a fixed seven year term and cover will reduce in line with the IHT taper relief.

An Example – Meet Muriel

Muriel is age 70, divorced with two adult children, Tom and Alice. She is relatively healthy and has made no other gifts in the last seven years. She has also used her £3,000 annual gift exemption.

Gifts To Tom and Alice

Muriel decides to make a gift of £250,000 each to Tom and Alice. The value of the gifts exceeds Muriel’s nil rate band by £175,000 and she is concerned about the potential IHT liability should she die shortly after making the gift. She therefore takes out a Gift Inter-vivos policy with an initial sum assured of £70,000 reducing by £14,000 per year from year 3.

Written In Trust

The policy would be written into Trust which would ensure that the benefits are available on death and do not form part of Muriel’s estate.

Term Assurance Policies

It can be difficult to find insurance companies who offer Gift Inter-vivos policies and it may be more competitive in terms of premiums for Muriel to take out a series of Level Term Assurance contracts to cover the potential IHT liability.

Other Considerations

Gift Inter-vivos policies (or a series of Level Term Assurance policies) can work well to protect the recipient from a potential IHT liability but they should be considered as part of a wider estate planning strategy.

For example, where an individual has made a large gift and dies within seven years, they have used up part of their nil rate band which isn’t then available to the beneficiaries of the rest of the estate. In this case, a Level Term Assurance policy could be considered to cover the lost nil rate band.

Where a person’s estate is significant and either they are not considering making gifts during their lifetime or they wish to protect their entire estate, consideration should be given to a Whole of Life policy which, if applicable, could be written on a Joint Life, second death basis. The sum assured would then cover any potential IHT for the entire estate rather than the specific gift.

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If you would like to discuss your estate planning options in more detail, please do contact us.

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This article does not constitute advice or recommendations.