Whole of Life Insurance for Inheritance Tax

What is Inheritance Tax?

An estate is the term used to describe the cash and property left by an individual after their death.

Inheritance Tax is the tax you pay on an estate when somebody dies and their estate is worth more than the nil rate band which is currently £325,000 (and frozen until 2014). The nil rate band is set by the government usually at each budget and is the amount they will allow you to pass from generation to generation without you having to pay tax.

Inheritance Tax is payable at 40% on estates in excess of £325,000.

The Financial Services Authority does not regulate Inheritance Tax or Will Writing.

An example:

For example, if you leave a property worth £425,000 to your children, this would exceed the nil rate band by £100,000 and the tax would be due of £40,000 (40% of the £100,000). There is six months in which to pay the Inheritance Tax without being liable to interest payments and if there were no cash in the bank of the estate then the property would have to be sold to pay this bill.

In this example you could take out £40,000 of life assurance which on death would be paid (via a Trust) to the children. This £40,000 would sit outside the estate and therefore not be taxed. It is also paid immediately and does not have to wait for probate to be granted.

Why is Whole of Life Assurance used for Inheritance Tax planning?

Whole of Life Assurance is the only type of life cover that will guarantee to pay a lump sum on your death whenever that may occur.

It is for this reason that it is the only policy that is specifically suitable for being used to help pay an Inheritance Tax bill.

The Whole of Life Assurance that we provide does not provide any cash in value as it is not intended to be a savings plan. The premiums however are guaranteed for life, they cannot ever be changed by the insurer once they have started.

More about Inheritance Tax planning

• Transferring an unused Inheritance Tax Threshold


Since October 2007, married couples and registered civil partners can effectively increase their nil rate band when the second partner dies to as much as £650,000 (2011-12).

Married couples and registered civil partners are also allowed to pass assets to each other during their lifetime or when they die without having to pay Inheritance Tax. It doesn't matter how much they pass on - as long as the person receiving the assets has their permanent home in the UK. This is known as spouse or civil partner exemption.

If someone leaves everything they own to their surviving spouse or civil partner in this way it's exempt from Inheritance Tax. It also means they haven't used any of their own Inheritance Tax nil rate band. This can be used to increase the Inheritance Tax threshold of the second spouse or civil partner when they die - even if the second spouse has remarried. Their estate can be worth up to £650,000 in 2011-12 before they owe Inheritance Tax.

There is then the possibility of using a Joint Life – Second Death Whole of Life Assurance policy in Trust for this reduced Inheritance Tax liability on second death, or if one spouse has already died then a Single Life Whole of Life Assurance in Trust would be best.
• Making a Will


If you die without leaving a Will, some of the people who you want to benefit from your estate may be unable to. It’s therefore always better to leave clear, legally enforceable instructions on what you want to happen.
• Making gifts to reduce the value of your estate


It is possible to give away parts of your estate to reduce the value for Inheritance Tax purposes, although these can only be done under specific headings to be exempt. Non-exempt gifts can be clawed back into the estate valuation.

Exempt gifts include:

Gifts to spouses or civil partners

Gifts to individuals more than seven years before death

Gifts not exceeding £3,000 in any one tax year

A gift made to a person who is about to get married or to form a civil partnership, this can be up to £5,000 if you are the person’s parent, £2,500 if you are the person’s grandparent of £1,000 made by anyone else

Gifts to UK charities

Gifts which are normal expenditure out of income. You must be able to show that after allowing for the gifts the donor was left with sufficient income to maintain their usual standard of living and that there was an established pattern of giving.

Business, Woodland, Heritage and Farm Relief. If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.

Small gift exception. You can make small gifts of up to £250 to as many individuals as you like tax-free.

Gifts for national purposes. Exemption from inheritance tax is given for gifts and bequests to certain national institutions such as the National Gallery. There is a list of approved national institutions.