In other words, those life policy proceeds will form part of the estate.
“That’s clearly inefficient from a tax perspective where that policy has been taken out to help fund the IHT liability,” Robb adds.
“The simple solution is to ensure that life policy is written in trust so that the proceeds are paid into the trust and not into the estate.”
This can save up to 40 per cent of the policy proceeds.
Robb explains, typically, a discretionary trust will be used. Ideally the policy will be placed in trust from outset, but it can be settled at a later date. The value of the gift for IHT purposes will need to be ascertained.
An added advantage is that providing there is a surviving trustee, then the proceeds can be accessible quickly without the need for probate.
If the policy only pays out on death, then the trust deed will exclude the settlor from benefitting.
Robb says: “If the policy is life or critical illness, then check if the provider offers a ‘split’ trust where critical illness proceeds can be for the benefit of the client but proceeds on death paid tax free for the beneficiaries of the trust.
Shaun Moore, tax and financial planning expert at Quilter, says taking a holistic view of a client’s wealth and financial aspirations is key when looking at how to best mitigate IHT.
Another option that may be available is for a client to direct who should receive their fund, allowing them complete control and removing the trustee discretion, but this means that the value of the pension death benefits will normally be counted as part of the member’s estate for IHT on their death.
Gareth Davies, pensions specialist at Scottish Widows, says: "It is important to regularly review nominations to keep pace with clients’ changing circumstances, and you may wish to consider building this into your regular client reviews. This is particularly important if a client has chosen the option of direction when confirming who should receive their fund."
Balancing gifting and income
While gifting earlier in life than later can play a huge part in reducing IHT liability, this must be balanced against the client having enough wealth to enjoy their retirement and also pay for any unexpected bills such as long-term care needs.
Therefore, cash flow modelling can be a good way of illustrating to a client just how much they can afford to gift without jeopardising their own financial wellbeing.
Moore adds: “While fairly common knowledge, it is always worth remembering that a gift over £3,000 will only be considered outside of their estate for IHT purposes if the person making the gift lives for seven years after the gift is given.
