On Life Insurance and Inheritance Tax....

I found out recently that it's possible to insure against Inheritance Tax in the U.K...

I was chatting with a friend recently who stands to inherit a house worth more than £1 million, nothing particularly usual if you've got parents in their late 70s who bought in the South East in the 1960s, but she'd have to pay 40% tax on everything over £325 000. That means basically selling the house.

Except that one of her parents has life insurance they pay to cover that inheritance tax.

Apparently they are now paying over £1000 a month for the privilege, given that they are well into their 70s, and they want my friend and her sister to start paying for the premiums as they're struggling to keep up the payments themselves. They go up every year, the payments.

TBH I am not surprised at the astronomical figures involved... I mean the average age of death is 85, and with the current 40% rate on inheritance, that means a £300K tax bill in a few years.

So even with payments of £1000 a month, over 10 years you're sill quids-in.

TBH I can see the premiums going up A LOT as the parent gets older, I mean surely it doesn't make any sense for insurance company to take in LESS than it's going to pay-out...?

Life Assurance Trusts

How it works is you set up a whole-0f-life-insurance trust, as trusts aren't taxable, and that's what you pass on to your children.

The tax then gets paid out of the trust, but the children don't have to sell the assets.

It's just about the only way to avoid selling a childhood home with the current inheritance tax situation, but MAN, do you pay for it!

In a way I guess it's like setting up a payment fund, kind of like a savings account, rather than insurance.

It's all news to me, I was really surprised at first, but the more I think about it, the more rational and obvious it all sounds, it's just sound financial planning, giving the current situation.

However the Tories may abolish Inheritance Tax...!

All of this is well and good, but of course the Tories have one more budget left before the GE, and they have been signalling to abolish inheritance tax.

I think this is a shoe-in given that most of them has a house worth over £1 Million, many will have an entire portfolio. Most of them probably use the trust-fund strategy already, but abolishing IH or raising the threshold to something like £2M would make life a whole lot more convenient for them, so it's an inevitability.

That might just bring Life Insurance Trust premiums down, CRASHING down as there's be little point to them for most estates, no advantage over just regular investments!