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Protection for life stages: Mature couples

22 August 2019

Alan and Jill are quietly confident they won’t have any IHT liability, but have they considered everything? And might a whole of life policy help them out?

Couple 1000x500

It would be great if everyone started inheritance tax planning in their 50s, but many don’t until it’s almost too late or too expensive. What will Alan and Jill do?

The circumstances

Alan and Jill are in a good position. They’ve worked hard all their life and have accumulated an estate worth £1milion, which includes a property worth about £400,000. It will all pass to the survivor on the first death and then onto their two children on the second death.

They each have access to the nil rate band and the residence nil rate band (R-NRB) which are both transferable. However, they think that as the R-NRB will be fully implemented by April 2020 they won’t have an IHT liability at all. Let’s see if they’re right.

First we need to look at the personal nil rate band, which has been static at £325k for more than a decade. It is transferable between married couples and civil partners and will increase by CPI, though not until April 2021.

Next we need to look at the R-NRB. It started off in April 2017 at £100k, increased to £125k in April 2018, and rose again to £150k in April 2019. A final increase, to £175k, is set to take place in April 2020.

Bear in mind that it is only available where the main residence is being left to a lineal descendant – children, grandchildren for example – and if the property is worth less than £350k then the R-NRB is reduced accordingly.

So their current liability in this tax year is £20k once we take the two lots of NRB and the two lots of R-NRB off, and multiply the remainder by 40%.

In theory, if the estate didn’t grow at all, in April 2020 when the R-NRB reached £175k, they would have no IHT liability. So they are partly right.

However, if the estate grows at 5% per annum, in five years’ time it will be worth £1.275m. We know both the personal NRB and the R-NRB will increase by CPI from April 2021 which, if we assume as 2%, would bring the NRB to roughly £345k per person and the R-NRB to £185k per person. That leaves a residual taxable estate on the second death of £215k, giving a tax bill of £86k.

So it’s not as simple as they think.

A possible solution

A simple solution for Alan and Jill would be to take out a joint life second death whole of life policy with a sum assured of £86k. They could write the policy in trust for their children so they have the cash to pay the IHT bill. And if Alan and Jill don’t want to pay the premiums, offer the children the chance to pay them (after all, a guaranteed whole of life policy can be a good investment policy too).

By adding indexation we can ensure the sum assured rises at either RPI, 3% or 5%, so that it keeps pace with any increase in the value of the estate. And if they decide they don’t need to increase the sum assured, they can refuse the increase up to three times before we remove the opportunity for more increases in the future.

They could argue: ‘Why would we want the cover now? Our liability will only be minimal for the next couple of years?’

Well, the issue is that, in five years’ time, if the value of the estate continues to grow at a faster rate than CPI, their liability will continue to increase. By then they will be five years older, and possibly in worse health. Premiums can increase significantly with age.