Families boost IHT insurance amid budget fears

Families are taking out insurance policies to cover potential inheritance tax (IHT) bills amid fears the government will make it harder to pass on wealth. Brokers report demand for IHT insurance has doubled since the chancellor revealed pensions will be included in estates for IHT from April 2027. Wes McCranor from Sphere Assured stated, “The budget definitely spurred people into making gifts and sorting out their estates sooner rather than later, and with that insurance to cover any liability.” Life insurance has long been popular to ensure families have a lump sum to settle tax debts when someone dies. Brokers have also seen an increase in clients taking out seven-year policies to cover potential tax on larger one-off gifts. IHT is charged on the value of someone’s estate when they die. The first £325,000 is IHT-free — £500,000 if the estate is under £2 million and includes a main home left to a direct descendant. Anything left to a spouse or civil partner is IHT-free. Couples can inherit each other’s allowances to leave a combined £1 million. Gifts made at least seven years before death are not counted for IHT, which is typically 40%. The IHT bill usually must be settled within six months of death. Beneficiaries can struggle to pay without liquidating investments or selling the family home. Property solely in the deceased’s name cannot be sold without probate — and IHT usually has to be paid before probate is granted. Families could take a loan to pay while waiting for probate or agree a payment plan with HMRC, but both incur interest. Three types of insurance can cover IHT: whole of life policies, “gift inter vivos” policies covering specific gifts, and term insurance for set periods or until age 90. Whole of life policies are most popular as single-life or joint-life second-death plans. Premiums must be paid until death for the policy to pay out.

Families seek insurance for IHT risks

28,975 whole of life policies were taken out in 2023, up 4% from 2022. Gift inter vivos policies last seven years. If you die within that time, the payout helps cover the IHT bill. The payout drops as the IHT tapers if you die between three and seven years after the gift. Reviewable policies have premiums reassessed after a certain period. Guaranteed policies have fixed premiums. Reviewable is initially cheaper but premiums can become unaffordable. The cheapest reviewable single life policy for £200,000 cover for a 50-year-old is £37.65 a month. This jumps to £214.89 for a 70-year-old. Guaranteed single-life for the same cover for a 50-year-old costs £212.33 monthly. McCranor advises holding policies in trust so payouts aren’t counted in the estate and potentially liable for IHT. Trustees give the money to beneficiaries to pay HMRC. The budget changes triggered a surge in families giving wealth away to reduce estate sizes before pensions are taxed. 41% of families changing financial plans intend to make more pre-2027 gifts. Chris Etherington from RSM explains, “The potential IHT on a gift typically follows the gift itself, meaning the person who received the gift can be liable to pay a tax bill if the donor dies within seven years. This is prompting queries around specialist life insurance, particularly when larger gifts are being made.” Mike Strutt from Risk Assured states, “Very often people use a blend of a whole of life policy, to cover the family home and cash left in the estate, and a shorter-term policy for any big gifts. The crucial thing to remember is that insurance for IHT is not tax avoidance — it is putting a plan in place to provide enough liquidity for your family to pay any tax owed after your death.”