Inheritance tax planning using Whole of Life protection

Transcription

1 For customers Iheritace tax plaig usig Whole of Life protectio Fid out more

2 02 At Aego, we wat to help families across the UK pass o their wealth to those they love the most. So we ve desiged our Whole of Life protectio policy specifically to provide moey to cover a iheritace tax (IHT) bill that s payable o your estate so more of your legacy ca pass to your beeficiaries.

3 Iheritace tax plaig 03 IHT plaig is a complex area, but is somethig you should cosider if you wat to leave behid a legacy. If this is somethig you re thikig about, you should speak to a fiacial adviser they ll be able to help you with this. The iformatio i this booklet is based o our uderstadig of curret legislatio, taxatio law ad practice, which may chage. What s IHT? IHT is collected by HM Reveue & Customs whe you die if the value of your property ad possessios (also kow as your estate) is worth more tha 325,000 if you re a sigle perso, or 650,000 if you re married or i a civil partership ad the IHT threshold is t used o the first death. The rate of IHT is 40%, which meas that if your estate is valued at 500,000 whe you die ad you re a sigle perso, your persoal represetatives will have to pay 70,000 i tax. This has to be paid withi six moths of you dyig, otherwise iterest is added. About IHT With the IHT threshold froze at 325,000 util 2017/18, ad property prices o the rise agai, IHT is somethig that could affect more people tha ever before. I fact, accordig to The Telegraph, 10% of the UK will be liable for IHT i 2018, compared to just 3% i The average size of estates payig IHT are valued betwee 500,000 ad 1 millio, highlightig that IHT impacts more tha just high-et-worth idividuals. I the 2013/14 tax year, aroud 3.4 billio was paid i IHT. You ca use our iheritace tax calculator to help you fid out if IHT will be payable o your estate.

4 Maagig a potetial IHT liability 04 There are thigs you ca do ow to help reduce your potetial IHT bill ad help cover the cost of it. Giftig your wealth Cosider giftig your wealth to your loved oes, which will allow them to beefit from ay iheritace early, while also helpig to reduce your potetial IHT bill. Tax-free gifts Each year, you ca gift up to 3,000 free of IHT. Ad if you do t use this allowace i a particular year, you ca carry it forward to the ext year for oe year oly. I additio, every year you ca make small gifts of up to 250 to each gift recipiet. There are also other exemptios that you ca cosider, which your fiacial adviser will be able to go through with you. Makig larger gifts I additio to your 3,000 yearly allowace, you ca also make larger gifts to other people. These are kow as potetially exempt trasfers (PETs). For larger gifts to be exempt from IHT, you eed to live for seve years from the date you make the gift. If you die withi this seve-year period, IHT will be payable by the perso you made the gift to. As you re more likely to survive this seve-year period the youger you are, it ca be beeficial to start giftig your wealth as early as possible to icrease the chace of this ot beig liable for IHT.

5 05 Here s a example of how giftig your wealth could work: Julie gifts her holiday home i Corwall to her daughter Kare. She has recetly divorced ad does t ited to use the holiday home ever agai. It s worth 500,000 ad the gai for capital gais tax (CGT) purposes is covered by Julie s CGT yearly exemptio. If she lives for seve years from the date she makes the gift, this will stay outside her IHT estate. But if she dies withi the seve-year period, Kare will have to pay IHT for it. This meas that the amout potetially liable for IHT is: 500, ,000 = 175,000 Julie s 325,000 IHT threshold wo t be available to offset agaist her remaiig estate for this seve-year period. Taper relief will apply after three years. This reduces the amout of IHT due i relatio to the gift over the seve-year period after you make the gift. Survival period Gift amout liable for IHT Taper relief percetage applied to the IHT due Iheritace tax due 0-3 years 175,000 0% 70, years 175,000 20% 56, years 175,000 40% 42, years 175,000 60% 28, years 175,000 80% 14,000 More tha 7 years Nil 100% Nil

6 06 Usig life isurace to cover your estate s IHT bill You ca take out life isurace to help cover the cost of ay IHT due o your estate whe you die. But did you kow that a term isurace policy will expire oce you live to a certai age? Aother optio available which could be more suitable for iheritace tax plaig is a whole of life policy. This will pay the beefit amout whe you die regardless of whe that is. If your policy is held i trust, your policy paymets will be treated as gifts. They ll be exempt from IHT if they re covered by the 3,000 yearly allowace or if the ormal expediture out of icome exemptio applies. For the ormal expediture out of icome exemptio to be available: the policy paymets have to be paid from your icome after tax regular paymets have to be made, ad you should t have to use your capital to maitai your lifestyle after these gifts are made Placig your life isurace cover i trust Ubiased s Tax Actio 2014 campaig foud that 530 millio is paid uecessarily each year i IHT due to life isurace policies ot beig placed i trust. By placig your life isurace policy i trust, the beefit amout will be paid to your trustees ad remai outside your estate so it wo t be liable for IHT o your death. The beeficiaries of the trust ca use this to help the persoal represetatives pay the IHT bill due o your estate. This meas that your estate ca be passed o to those you ited it to, rather tha beig used to pay a tax bill.

7 Our Whole of Life policy 07 We ve desiged our Whole of Life policy specifically for IHT plaig, so that you ca make sure that your legacy is passed to your loved oes. You ca choose to apply o your ow to provide isurace o your life, kow as a sigle-life policy, or apply with aother perso usually your husbad, wife or civil parter to provide isurace o both your lives, kow as a joit-life policy. How we outshie the market We ve built some features ito our policy that are uique to the market ad make our Whole of Life policy particularly suitable for estate plaig. Itegrated trust ad applicatio We wat to put a stop to the 530 millio that s paid uecessarily each year i IHT, so we ve made it as easy as possible to place your policy i trust. What s more, if you re eligible for free cover ad your adviser uses our itegrated trust process, your free cover will also be placed i trust. So if you die while we re processig your applicatio, ay free cover claim wo t add to your IHT bill. You ca fid full details of our free cover i our Key features of the Whole of Life policy. The trust we use for Whole of Life is a discretioary trust. With a discretioary trust, the trustees have the power to make paymets to a wide rage of beeficiaries, so it remais flexible eve if your circumstaces chage. They ll cotrol who beefits from your policy ad how much they ll receive. To help them, you ca choose to complete a omiatio form to ask the trustees to cosider your preferred beeficiaries. Whe applyig for our Whole of Life policy, it ca be placed i trust at the same time so there s o delay or chace of forgettig to do this oce the policy s set up. We re curretly the oly provider offerig this itegratio.

8 Cover that ca icrease with your chagig circumstaces No-oe ca predict the future. So we ve made sure that the amout you re covered for ca icrease as your circumstaces chage without havig to provide ay more medical iformatio. We do this by offerig a rage of guarateed isurability optios, coverig a diverse rage of circumstaces, icludig: a rise i your potetial IHT liability gettig married movig home What s more, you ca use our guarateed isurability optio for a risig IHT liability up to the age of 70, which is the highest age available i the market. You ca fid full details of all the guarateed isurability optios available, alog with ay limits that apply i our Policy coditios Protectig IHT payable o ay gifts you make If you make a PET to gift some of your wealth ad the value of the PET is more tha the amout of your available IHT threshold, you ca choose to covert some of your beefit amout ito gift iter vivos (GIV) isurace. GIV is cover that reduces over the seve-year period i lie with curret tax legislatio to protect the IHT liability that might arise if you die withi this period. As this cover reduces, you ca make sure that you re ot payig for excess cover ow that you have a reduced IHT liability. You ll also have the reassurace that you wo t be leavig ay upleasat IHT surprises for the perso you made the gift to whe you die. 08 We also iclude a legislatio optio with our GIV isurace. This meas that if IHT legislatio chages durig the seve-year period, you ca choose to either icrease your amout of isurace or exted the term of your isurace. After seve years, the value of the PET will fall outside your IHT estate ad the IHT threshold will be available agai to offset agaist the remaider of your IHT estate. You should cosider reviewig the level of cover at this stage to make sure that you re ot payig for too much cover. Splittig a joit-life policy i future If the upredictable happes ad you divorce or dissolve a civil partership, you could split your joit-life policy ito two sigle-life policies regardless of whether your policy is set up o a joit-life first death or a joit-life secod death basis so you do t have to lose your IHT protectio. If you have a joit-life first death policy, both parties (or the trustees) will receive a sigle-life policy for 100% of the beefit amout o the origial policy. If you have a joit-life secod death policy, the beefit amout will be split i lie with each party s IHT liability followig the divorce. The combied total of both sigle-life policies ca t be more tha 100% of the origial total beefit amout.

9 09 What else our Whole of Life policy offers We do t just stop there we also iclude the followig value-added features. Free cover We ll offer up to 1 millio free cover for up to 90 days, to help cover ay IHT liability while we re processig your applicatio. So you ll have the reassurace that you re covered from day oe. Free cover is t available if at the time of your applicatio: you ve applied, or are i the process of applyig, for similar cover with aother isurace compay ay perso to be isured by the policy is aged 70 or older you have a dimiished metal capacity You ca fid full details about our free cover i our Key features of the Whole of Life policy Future-proofig your policy As the cost of livig icreases due to iflatio, you ca choose to future-proof your policy by choosig our iflatio-liked feature. This meas that the amout you re covered for will icrease each year i lie with the Retail Prices Idex (RPI). Your policy paymets will also icrease at the same time. To make sure that your policy remais as flexible as possible, you ca choose to stop iflatio-likig at ay time, for example if you feel that your beefit amout is at a reasoable level or your paymets are gettig too high. If you chose to do this, we d freeze your beefit amout at that level, ad your paymets would stay at the same level. Protectig your paymets If you have a accidet or become ill, ad you re ot able to work, your IHT liability wo t disappear. To make sure that you ca keep your cover i place, you ca choose to protect your paymets. This meas that if you re uable to work due to sickess or accidet ad meet your chose defiitio of icapacity, we ll make your paymets for you, so that your IHT liability stays protected. If you choose this optio, it will ed whe you tur 67 years old. Termial illess cover We do t oly cover you whe you die. We ll also pay the beefit amout if you re diagosed with a termial illess. For this to be payable before you die, you ll eed to meet our defiitio of termial illess, which you ca fid i our Policy coditios. The termial illess cover will be i trust if your policy is held i trust.

10 Whole of Life policies i practice 10 We ve looked at what IHT is, how you ca reduce your potetial liability ad what our Whole of Life policy has to offer. So ow let s look at some case studies showig how our Whole of Life protectio policy could work. Remember these are oly examples ad do t take accout of your persoal circumstaces. Case study 1 A retired married couple James ad Elizabeth are both aged 68 ad retired. They have two grow-up childre ad four gradchildre i their tees. They receive a combied pesio icome of 50,000 a year i total from their workplace pesios ad state pesios, ad 5,000 from their loa trust. Both are basic-rate taxpayers. They ve writte wills which state that whe the first oe dies, everythig is to go to the survivig spouse, icludig the outstadig loa repaymets o the loa trust. O secod death, everythig passes to their two childre. James ad Elizabeth s combied wealth is as follows: House (with o outstadig mortgage) 450,000 ISAs 70,000 Ivestmets i uit trusts ad ope-eded ivestmets compaies (OEICs) through a geeral ivestmet accout (GIA) 80,000 Loa trust (outstadig loa due to estate) 80,000 Cash i the bak 60,000 Others (cars, jewellery, atiques, paitigs) 160,000 Total 900,000 IHT liability James, as his mother s persoal represetative, faced a IHT bill whe his mother passed away ad had to sell her house to fud this. He does t wat his childre to face the same problem. James ad Elizabeth have made o previous gifts ad therefore each have a full IHT il rate threshold available. This meas that the persoal represetatives will have a total IHT threshold of 650,000 (2 x 325,000) to use o the secod death. The IHT payable if both were to die ow would be: ( 900, ,000) x 40% = 100,000

11 They re reluctat to make large gifts just ow that would reduce their estate as they re worried about their care i retiremet particularly as their childre both live may miles away. However, they d like to do somethig to help their childre pay their potetial IHT bill. The solutio James ad Elizabeth take out a joit-life secod death Whole of Life policy, which is held i trust for the beefit of their childre. The iitial beefit amout is 100,000 ad, as they ve chose the iflatio-likig feature, this will icrease each year i lie with the retail prices idex (RPI). Their policy paymets will also rise each year. James thought that this was sesible give the recet house price icreases. This policy will provide the fuds to pay ay IHT due after they both die. The trust optios By placig the policy i trust, the beefit amout payable whe both James ad Elizabeth die wo t be icluded i their estate. Paymet ca be made to the trustees without the eed to wait o the grat of probate. The trustees ca be James ad Elizabeth s childre or a professioal trustee, such as the lawyer who drafted their wills. Their adviser recommeded they set up a discretioary trust at the same time as they apply for their Whole of Life cover. This meas the free cover offered will be i trust ad the policy will be issued to their trustees. 11 The policy paymets where a discretioary trust is used Each policy paymet is treated as a gift for IHT purposes uless it s covered by oe of the available exemptios. As James ad Elizabeth have made o gifts this year they each have the 3,000 yearly gift exemptio ( 6,000 i total). As their gradchildre are about to go to uiversity they might i future use this exemptio to make gifts to them. I this case, they could use the ormal expediture out of icome exemptio istead. This meas that they ca make the paymet out of their icome without reducig their ormal stadard of livig. Pesio icome would be classed as icome for this purpose, but the icome from the loa trust would t. Summary As it stads, if James ad Elizabeth were to die, their persoal represetatives would face a IHT bill of 100,000. A joit-life secod death Whole of Life policy, held i a discretioary trust with a iitial beefit amout of 100,000, will give their childre the fuds to pay ay bill without eedig to wait for a grat of probate. The cover icreases each year by RPI to help take accout of ivestmet returs or icreases i house prices. The discretioary trust allows the trustees to pay the beefits to a rage of beeficiaries. Where the policy is to be held i trust, the policy paymets will likely be covered by oe of the available exemptios. Without puttig this policy i place, James ad Elizabeth s beeficiaries would receive 40% less iheritace whe they die, as they d have to use some of the value i the estate to pay the IHT bill.

12 12 Case study 2 A widow A is a 58-year-old widow. Her husbad died three years ago ad this has focused her mid o what will happe whe she dies. Her estate is curretly made up of the followig assets: Residetial property 700,000 Cash i the bak 250,000 ISAs 300,000 Ivestmets 150,000 Less Outstadig mortgage 50,000 Total 1,350,000 IHT liability Whe A s husbad died, his full IHT threshold of 325,000 was used as he left legacies totallig 325,000 to his childre. If A were to die ow, her persoal represetatives will oly have her IHT threshold of 325,000 available. A s will leaves everythig to her two grow-up childre i equal proportios. If she were to die ow, her persoal represetatives face a IHT bill of: ( 1,350, ,000) x 40% = 410,000 A s reluctat to make ay substatial gifts at the momet as she does t wat to reduce her stadard of livig. However, she s kee to make sure that her childre have the fuds available to pay her IHT bill. The solutio A takes out a Whole of Life policy with a beefit amout of 410,000. This is placed i a discretioary trust to make sure that it s ot icluded i her estate. I the evet of a valid claim, the beefit amout ca be paid to her trustees without the eed to wait for the grat of probate. 10 years later A is 68 ad has paid off her mortgage. Her estate is ow made up of the followig assets: Residetial property 700,000 Cash i the bak 200,000 ISAs 400,000 Ivestmets 50,000 Total 1,350,000 A decided to withdraw the moey from her ISAs ad gift it to her childre to help with property purchases. Although ISAs are icome tax ad capital gais tax efficiet, they re subject to IHT whe she dies. By giftig this 400,000 to her childre, she ll be makig a potetially exempt trasfer (PET), which will remove the value from her estate as log as she survives the seve-year period after makig it. As the gift is above the IHT threshold of 325,000, taper relief would apply to the IHT that would be payable if she were to die withi seve years. Taper relief reduces the IHT due if she lives for more tha three years from whe the gift was made.

13 13 Oly the amout above the IHT threshold will be liable for IHT. I this case that s: 400, ,000 = 75,000 The iitial 325,000 of the gift will be covered by A s IHT threshold. This meas that this wo t be available to offset agaist her remaiig IHT estate durig this seve-year period. The IHT due o the gift would be as follows: Survival period Gift amout liable for IHT Taper relief percetage applied to the IHT due 0-3 years 75,000 0% 30, years 75,000 20% 24, years 75,000 40% 18, years 75,000 60% 12, years 75,000 80% 6,000 More tha 7 years Nil 100% Nil Iheritace tax due The trustees covert 30,000 of A s Whole of Life policy ito GIV isurace to protect the potetial IHT liability, should she die withi the seve-year period. The cover will reduce based o the IHT due i the table above. After seve years this cover will stop ad there will be 380,000 worth of Whole of Life cover remaiig. As her IHT threshold will be available agai to offset agaist her IHT estate, she should cosider reviewig the level of cover to make sure that she s ot payig for too much. Summary A took out a Whole of Life policy for 410,000, held i trust, to help her childre pay the IHT bill that s due whe she dies. 10 years later A made a gift of 200,000 to each of her childre usig her ISA savigs. This gift of 400,000 is treated as a PET. The trustees coverted 30,000 of A s Whole of Life cover ito GIV isurace to cover this PET. This isurace stopped after seve years, leavig the trustees with 380,000 of Whole of Life cover remaiig. If A did t take this actio, her beeficiaries would have to use some of the value from her estate to pay the IHT bill, which would leave them with a iheritace worth 40% less tha she d iteded.

14 14 Case study 3 Divorcig couple Laura ad Craig are both aged 49. They both work ad receive 50,000 salary each. They re both i good health ad do t smoke. They have the followig assets, which they ve left to each other i their wills: Residetial property (o mortgage, joitly-owed) 500,000 House i Devo (o mortgage, joitly-owed) 250,000 Cash i joit bak accout 50,000 Joitly-owed ivestmets held i a geeral ivestmet accout (GIA) 75,000 ISAs ( 75,000 each) 150,000 Share pla (from Craig s previous employmet) 100,000 Total 1,125,000 Iheritace tax liability They both kow that if they were to die their persoal represetatives would be left with a IHT bill. As a married couple they have a combied IHT threshold of 650,000 available to their persoal represetatives o the secod death. If they were both to die ow their IHT liability would be: ( 1,125, ,000) x 40% = 190,000 The solutio As they re still youg, they re reluctat to make ay gifts to reduce their estate, so take out a joit-life secod death Whole of Life policy with a beefit amout of 190,000. This is placed i a discretioary trust for the beefit of their two childre, with the itetio that it covers their IHT bill. Five years later Laura ad Craig have bee livig apart for two years ad decide to divorce. They ve come to a agreemet that Craig will keep his salary, his shares, his ISA ad the property i Devo which he ll live i. Laura will keep the residetial home, her ISA ad her salary. Their joit bak accout ad other ivestmets will be split i half. Neither of them has ay plas to get married agai. Laura s IHT liability Laura s assets are ow made up as follows: Residetial property (o mortgage) 500,000 Cash i the bak 25,000 Ivestmet held i a GIA 37,500 ISA 75,000 Total 637,500 If Laura were to die ow, her IHT liability would be: ( 637, ,000) x 40% = 125,000

15 15 Craig s IHT liability Craig s assets are ow made up as follows: House i Devo (o mortgage) 250,000 Cash i the bak 25,000 Share pla 100,000 Ivestmets held i a GIA 37,500 ISA 75,000 Total 487,500 If Craig were to die ow, his IHT liability would be: ( 487, ,000) x 40% = 65,000 The trustees use the separatio optio icluded i their Whole of Life policy, to split their beefit amout ito two separate policies. The trustees receive two sigle-life Whole of Life policies, oe with a beefit amout of 125,000 ad oe with a beefit amout of 65,000. Both policies are held uder the origial discretioary trust. Laura ad Craig, as trustees, seek legal advice o how to deal with this. Laura ad Craig s IHT liability will have chaged as they ca o loger make IHT exempt gifts to a spouse or iherit their spouse s uused IHT threshold. Now, their persoal represetatives will potetially face IHT bills o the death of both Laura ad Craig. Summary Laura ad Craig took out a joit-life secod death Whole of Life policy, placed i a discretioary trust, while they were married to make sure that their childre had fuds to help pay their IHT bill. Five years after takig out the policy, Laura ad Craig divorced. Their trustees used the joit life separatio optio uder their Whole of Life policy ad received two ew sigle-life policies i lie with their revised IHT positio, both held i the origial discretioary trust. Laura ad Craig took legal advice o how the discretioary trust would work goig forward. Laura ad Craig s IHT liabilities have chaged as their persoal represetatives ca o loger claim the first spouse to die s IHT threshold o the secod death. Neither Laura or Craig ca make IHT exempt gifts to a spouse, ad their assets have bee split betwee them. If either Laura or Craig were to die, their childre would have eough moey to help meet the IHT liability. Without their Whole of Life policy, Laura ad Craig s childre would have to use 40% of both their parets estates to pay the iheritace tax bills due o each estate so their iheritace would be 40% less tha expected.

16 16 Next steps Dyig is t somethig we wat to thik about. But by doig some IHT plaig ow ad puttig some simple measures i place, you ca reduce the potetial tax bill that will eed to be paid o your estate, ad help cover the cost of this. So your wealth ca pass to those you ited it to. Do t delay speak to a fiacial adviser ad start your IHT plaig today. We re proud to be the Lead Parter of British Aego is a brad ame of Scottish Equitable plc. Scottish Equitable plc, registered office: Ediburgh Park, Ediburgh EH12 9SE. Registered i Scotlad (No ). Authorised by the Prudetial Regulatio Authority ad regulated by the Fiacial Coduct Authority ad the Prudetial Regulatio Authority. Fiacial Services Register umber A Aego compay Aego UK plc C IP /14