Protecting IHT gifts with protection

07 January, 2025

Protection Taxation and trust

As more estates face an inheritance tax liability, more customers will be looking to do IHT planning in 2025 and beyond. Our joint life second death life term policy, with gift inter-vivos option, maybe just the solution…

With IHT receipts hitting an all-time high of £7.5bn* in 2023/24, and following the proposed IHT changes in the Autumn Budget, are forecast to grow to £13.9bn* in 2029/30. As a result, this may put a greater emphasis on estate planning and gifting, for those who face an inheritance tax (IHT) liability.

As announced in the Autumn Budget, the inheritance tax threshold of £325,000 will now remain frozen until at least April 2030, by which stage it will have remained unchanged for 21 years. An analysis by AJBell** suggests that it should be £555,000 by then if it had risen in line with inflation.

Despite the introduction of the residence nil rate band of £175,000 (which is also frozen until 2030), continued house price growth and stock market performance, is pulling many more estates into the IHT net. With the proposals to include unused pension funds and pensions death benefits in the client’s estate for IHT purposes from April 2027, and the reform of agricultural and business relief from April 2026, the number of deaths subject to IHT is set to grow to nearly 1 in 10 (9.5%).

As advisers know, it is vital to forward plan. Various planning approaches can continue to be used to help clients mitigate an IHT liability, from lifetime gifting to investing in assets that attract business relief (up to certain levels) and maximising pensions for the time being in certain circumstances, which can be passed on tax efficiently. Another valid and frequently used option to address IHT is to make provisions to meet the liability. One effective way to do so is through a joint life second death term policy.

What is joint life second death?

Joint life second death cover is a benefit that pays out on the second death or terminal illness of both lives assured. This is also an option on our whole of life product.

A joint life second death whole of life plan pays out whenever the last surviving person on the policy dies provided the premiums have been paid, whereas a joint life second death term policy pays out on the second death only during the term of the policy, albeit to a maximum age of 89. However, some also include the option to cover any gifts made using a ‘gift inter-vivos benefit’ (with no additional underwriting).

How does it aid IHT planning?

Second death policies are a key tool for advisers to have in their IHT planning toolkit. They are well suited to clients who have built up an estate (or expect their estate to grow, maybe from an inheritance) and want to take steps to meet the cost of the IHT, thereby enabling the estate to pass to their chosen beneficiaries intact. This protects their dependents against the financial implications on their death, such as having to sell a family property to meet the liability.

Where clients may also want to take steps to reduce their IHT liability, by gifting assets away (to beneficiaries), then the ‘gift inter-vivos benefit’ can be used to cover the IHT on death during the 7-year survival period.

What is the target market?

The primary target for joint life second death term cover are clients aged over 50 who have a potential IHT liability and want peace of mind that it has been addressed during their lifetime, instead of leaving their beneficiaries to deal with it following their death.

Joint life second death term cover is aimed at those who primarily require cover for a fixed term and is likely to be suitable for clients who are either unable to afford whole of life cover or who plan to gift assets away during their lifetime to reduce their IHT liability by a certain age.

Our joint life second death term plan is designed to give our financial advisers more options for IHT planning, allowing them to give their high-net worth clients – our customers – more choice. It can better meet requirements in certain estate planning cases and is likely to be cheaper than a whole of life alternative.

What do I need to know about this cover?

Here are some key facts advisers should know about our joint life second death term cover:

It is only available where the main benefit option selected is ‘life cover only’ and is on a level or increasing cover basis.
We will not offer a renewal or a conversion option with this.
We will continue to offer joint life separation benefit as an option for customers, but the total sum assured of the two new policies will be limited to no more than the sum assured on the original joint life second death policy.
During underwriting, if one life is declined, we will offer alternative terms for the policy still to be issued on a joint life second death basis, but using the single life premium rate of the accepted life. This will mean that the declined life will still be able to be covered and follows the same process we follow on a second death whole of life policy.
We will continue to offer multi-fracture cover and waiver of premium as paid-for options for each life on the policy subject to our existing age limits (though we expect most customers may be beyond these).
Our award-winning Accelerate benefit is also available on life term policies up to age 70.
Customers taking out a joint life second death term policy will be able to use our online discretionary trust, or our absolute trust through our paper trust process.

So, how does it work?

Case study

Mark and Emma live in Bath, Somerset, and they’re both 60-years old. They have a daughter (Sonia, 30) and a son (David, 33) who both have young children.

Mark and Emma’s house is currently valued at £800,000 and they have other assets totalling £200,000. Mark’s dad recently passed away and left them another £1,000,000 in assets.

They haven’t used any of their nil-rate bands (NRBs) previously, so they have £1,000,000 in NRBs and residence NRBs. This means that the other £1,000,000 of their assets is subject to 40% inheritance tax, leaving them with £400,000 in IHT bills, but they are planning on gifting some to their children in the future to reduce this.

Their financial adviser recommends that they take out a 29-year Joint Life Second Death policy with a gift inter-vivos benefit, for a sum assured of £400,000. This is a more cost-effective solution (with a JLSD policy being approximately 50% cheaper than a Whole of Life policy), and will enable them to cover gifts in future without any further underwriting.

Two years on, Mark and Emma have decided to give both Sonia and David £0.5m each. Their adviser has highlighted that should either one of them die within 7 years, there could be an IHT liability of up to £70,000 payable by their children (£0.5m - £325,000 = £175,000 * 40%), reducing by taper relief.

To cover this liability they can both use the gift inter-vivos benefit to exchange £70,000 of joint life second death cover, for five £14,000 single life level term policies, each for 3/4/5/6/7 years, to cover the liability. This can be done without any further medical evidence and the cost will be more than covered by the premium reduction in the joint left second death policy, as the sum assured has been reduced down to £260,000.

On death within 7 years, the various single life policies would pay out to meet the reducing liability. On survival, the remaining IHT liability in their estate can be calculated and the sum assured under the joint life second death policy reduced if appropriate. If further gifts were to be made, then they can keep using the gift inter-vivos benefit, until such time as all of the original joint life second death cover has been used up.

*Sources: