This short video takes a look at insurance for inheritance tax liability called a Life Assurance Policy using trusts, as well as the impact a charitable donation can have on the amount payable by the beneficiaries.

A video transcript is provided further below, if you would prefer to read about it.

Insurance For Inheritance Tax – Video Transcript

There are many ways to plan to tackle a future inheritance tax liability.

This includes using exemptions, tax favourable schemes and making gifts but in some cases it could be that the simplest and most effective way to deal with this is through a life assurance policy.

This is not a means to reduce the liability but a way to cover it. The cost of a life assurance policy, especially a joint policy for a couple that pays out on the second death may be much lower than you would expect.

Such a policy is set up to pay the future inheritance tax liability, which means your beneficiaries receive the full value of your estate.

Life Assurance Policy

The policy must be written in trust to make sure that the payout is not added to your estate.

You could look at using trusts in a broader fashion during your lifetime. There can be circumstances where placing some of your assets into a trust arrangement will reduce your future inheritance tax liability.

Once money is in a trust it will normally no longer form part of your estate. However, the trust itself may be subject to tax, so this needs to be carefully assessed. And in most cases, you will need to live for 7 years from placing the assets into the trust for the trust to become fully effective.

A trust provides flexibility for protecting the wealth of your family, both in the present and the future. It can support the differing needs of different generations at once as well as neatly dealing with the responsibilities of modern family arrangements, from stepchildren and ex-spouses to civil partners and ageing parents. Trusts can also shelter the future of family businesses.

Charitable Donations

Finally, if you wish to leave some money to charity, this can be helpful in reducing inheritance tax. A charitable donation is taken off the estate value before inheritance tax is calculated. Meaning the charitable gift has no tax applied to it. And if the donation is large enough, at least 10% of your net estate the rate at which inheritance tax is levied on the remainder of the estate is reduced from 40 to 36%

The following examples demonstrate how a charitable donation can affect inheritance tax.

Example One
Mrs Goodwill (a widow) dies leaving her estate to two children. The table below shows the impact of a £20,000 charitable donation. Whilst the charity gift reduces the children’s inheritance by £12,000, Mrs Goodwill actually leaves £8,000 more in total.

No Charitable Donation

  • Estate Value £1,400,000

  • Nil Rate Band Allowance £1,000,000

  • Taxable Estate £400,000

  • 40% tax = £160,000

  • Children Inherit £1,240,000

£20,000 Donation

  • Reduced Estate Value £1,380,000

  • Nil Rate Band Allowance £1,000,000

  • Taxable Estate £380,000

  • 40% tax = £152,000

  • Children inherit £1,228,000

  • £20,000 donation to charity

Example Two
Mr Wellbeloved dies leaving a NET estate of £1m to four children. The table below shows how a £100,000 charitable donation (10%), effectively only costs the four children a total of £24,000 because of the inheritance tax saving.

No Charitable Donation

  • Net Estate Value £1,000,000

  • 40% tax = £400,000

  • Children inherit £150,000 each

£100,000 Donation

  • Reduced Net Estate Value £900,000

  • 36% tax = £324,000

  • Children inherit £144,000 each

  • £100,000 donation to charity

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The complex nature of inheritance tax means there can be many ways of structuring ones affairs and balancing out the financial needs with legacy wishes.

We can provide the specialist advice to help you with these balancing requirements.

To speak to an IFA about insurance for inheritance tax, contact Tony Thomas on 07585 592494 or