Interitance Tax Planning Using Insurance
Interitance Tax Planning Using Insurance
One form of planning that is often overlooked is an annuity combined with a life policy. This can be attractive if you are past retirement age and in normal health.
For example, at the age of 80 you use £100,000 to purchase a life annuity. This will provide you with £12,000 pa of which £2,400 will be taxable as income.
Assuming you are a top rate taxpayer, you will pay just under £1,000 pa on the income element leaving you with £11,000 net. The balance of the annuity is treated as a tax free return of capital.
You then purchase a life insurance policy which will pay a sum of £100,000 on your death. The policy is written in trust for the benefit of your heirs. The annual premium on the life policy is say £11,000.
Subject to the health warning below, the tax results are as follows -
1. The £100,000 used to purchase the annuity immediately disappears from your estate.
2. The life policy proceeds are not liable to IHT on your death.
3. You are treated as making a gift of each £11,000 life policy premium. Each premium will only escape IHT on your death if you survive the payment by seven years.
Thus assuming your estate will pay IHT at 40% you have achieved an immediate saving of £40,000 by purchasing the annuity. The annual premiums on the life policy will reduce this saving, but they may partly be covered by exemptions.
There are anti-avoidance rules which the Inland Revenue can invoke to regard the annuity and the life policy as “associated operations” and treat the sum used to purchase the annuity as a seven year gift. However these rules will not apply if you can show -
(i) that the life policy was issued on full medical evidence of health; and
(ii) that if would have been issued on the same terms even if the annuity had not been purchased.
The Inland Revenue recently won a case in the High Court (Smith v HMRC). The annuity and the life policy had both been effected with the same insurance company, and the company had simply required a medical questionnaire to be completed. The Judge held that this was not full medical evidence of health.
We always recommend that the annuity and the policy are effected with different insurance companies, and that the life policy should be fully underwritten, which will usually involve a medical, or at least a report from your GP.
We do not advise on individual insurance based products.
If you do not have your own Independent Financial Adviser we would be able to introduce you to one.