The IHT due on the gift is £11,136 {£69,000 x 40 per cent = £27,840 – ( taper relief £27,840 x 60 per cent = £16,704) = £11,136) and £160,000 (£400,000 x 40 per cent) on the remaining estate.
Case study
The following case study shows an example where a client is in the process of making gifts and illustrates where life insurance can be used to make sure the funds are available to pay any IHT due.
Mr Singh is 74 and was widowed three years ago. When Mrs Singh passed away her nil-rate band was fully utilised and hence there is no transferrable nil-rate band available to Mr Singh.
The total value of Singh’s estate before any gifts is £1,850,000, and he is looking for some advice to reduce the IHT liability on his estate, or at least make the funds available to pay the tax.
Singh has a grown-up son and two grandchildren. Our example assumes that the annual exemption of £3,000 has already been used, and there have been no other gifts made.
Following advice, Singh has recently gifted £325,000 into a discretionary trust for his grandchildren. He is also going to gift £100,000 to his son to help with a house purchase.
The most appropriate life insurance solutions for Singh are as follows:
Gift of £325,000 to the discretionary trust – level term insurance policy.
This is the first gift, and hence is the first asset to set against the nil-rate band. The gift is £325,000, using all the nil-rate band, and means that no IHT is payable either at the time of the gift or on death.
This gift will fall outside the estate after seven years, but until that point it is using the nil-rate band, which has the effect of increasing the potential IHT liability on the residual estate.
The ideal life insurance for this gift is a seven-year level term insurance policy for £130,000 (£325,000 x 40 per cent).
The plan should be taken out by Singh, but placed into a suitable trust, usually a bare or discretionary trust, so that the proceeds of the policy are not paid to his estate.
The premiums are likely to be exempt transfers under the gifts from normal expenditure rules or annual gift exemption.
Gift of £100,000 to his son – gift inter vivos term insurance policy.
In the event of Singh’s death within seven years of making the gift to his son, this gift will become chargeable and his son would be liable for any IHT payable.
With all the available nil-rate band used by the previous gift to the discretionary trust, this means that it will be subject to IHT at 40 per cent.
Taper relief will apply and the potential IHT payable is as follows:
