Inheritance tax - Not just a concern for the seriously wealthy
In the current tax year if your property is valued in excess of the combined £650,000 nil rate band for married couples and registered civil partnerships, or if you intend to use your nil rate band allowances on other assets, it is advisable to make provision to protect the value of your property against a future IHT bill.
Professional advisers over the years have fought an ongoing battle of wits with HM Revenue & Customs in an attempt to keep high value principal residences out of the reach of IHT. So what steps could you take to plan for this eventuality?
Insuring against a future tax bill
A joint whole-of-life, second death policy written in an appropriate trust for your heirs, could pay out a sum assured equal to an expected IHT liability when the second spouse dies. Premiums are normally paid monthly or yearly for as long as you live. The trust structure also means that beneficiaries could obtain the proceeds on day one, rather than having to wait for up to six months for probate.
Lifetime mortgage or equity-release schemes
Another option if appropriate to your situation is to consider using a whole-of-life policy as a tax planning tool, in conjunction with a lifetime mortgage or equity-release scheme secured on the property.
You are allowed to borrow up to 30 per cent of the value of the property under equity release, depending on your age, which can be used to fund life assurance. The interest on the loan rolls up, and is repayable, together with the capital when you die, reducing your estate and the IHT bill. The life assurance proceeds are paid outside of the estate and could mean that your heirs end up with substantially more than with no scheme in place.
A drawdown arrangement, in which the equity release provider allows you to access the money a little at a time to fund monthly premiums, may assist to limit the impact of rolled up interest.
Another option could be to use the capital from the property to invest in Alternative Investment Portfolio IHT portfolios, whereby assets drop out of the estate in just two years. Alternatively there are discounted gift plans, in which the value of the asset may be discounted from day one. A third possibility is to use the capital to buy an annuity so that the income funds a whole-of-life policy. There are even family debt schemes created to avoid IHT on the family house.
Need more information? Please email or contact us with your enquiry.
Levels and bases of, and reliefs from, taxation are subject to change.