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Inheritance Tax is an unwelcome burden to families on the death of a loved one. It hits straight away as it has to be paid even before Probate can be obtained and control established over the assets of the deceased.
Indeed, this can itself cause difficulties as Executors do not have access to assets without Probate. This apparent 'Catch 22' situation is fortunately resolved by the willingness of banks to release or lend money to pay the tax.
Nevertheless, this does highlight the benefit of trying to reduce liabilities during one's lifetime in order to reduce the difficulties on death. If the tax is reduced or avoided, then the problem is that much lessened.
There are many techniques for this ranging from the use of gifts and trusts to a whole suite of regulated investment products. If you are concerned about Inheritance Tax, then you should seek advice about whether or to what extent any of these strategies could help your situation.
Sometimes, however, we are left with an intractable problem where it is simpler to consider ways of funding and paying the tax. This is very much a last ditch option and should only be used as a last resort in a relatively small number of cases.
One way to do this is by taking out a whole of life insurance policy for the required amount. The beneficiaries of this policy should be your heirs(usually using some form of trust). If you do not do this then Inheritance Tax will also be charged on the policy proceeds.
These policies can often look very attractive but they pay out only if you keep paying for the rest of your life. The insurance companies know that most people will be unable to do this and rely on that fact. Circumstances do change. You might go into residential care and be unable to afford it or you might simply have other more pressing uses for the money. tax liabilities can also change. Most people do find a reason to stop the payments at some stage so you should think very carefully before you go down this road.
So is there a ready alternative? You could save up to pay the tax - but you would have to do so in trust outside of your estate to avoid Inheritance Tax being charged on it. Nevertheless, this does at least provide the security of having a sum available to the family even if you want to stop paying. It is also more flexible in that you can vary payments to take account of changes in circumstances. You can even take payment holidays.
Of course, what this doesn't deal with is the possibility of an early death. The fund would not have had the chance to grow. What I suggest, therefore, is that you combine the idea with a (relatively cheap) term insurance policy which would pay out only in the event of death in the early years.
Like any other planning, make sure you look at all the options before deciding what to do.
Bob Wheatcroft, Partner at Fairview House in Carlisle
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