Written by Ray Coman
Life assurance is a product that pays a redefined sum in death to the loved ones of the deceased. The cost of premiums is primarily calculated based on the heath and estimated life span of the life assured and the pay-out agreed. Therefore, premiums tend to increase with age. The type of insurance is a standard part of an employee benefits package.
A lump sum paid directly to the estate of the deceased would is potentially liable to inheritance tax. For this reason the insurance is commonly set up in a Trust.
Premiums are paid out of ordinary income and therefore very rarely treated as gifts for inheritance tax purposes.
When the policyholder passes away, the insurer pays the Trust, and not the estate of the deceased. Since a Trust has its own nil rate band independent from that of the settlor, any inheritance tax will be considerably less when the lump sum is paid. Beneficiaries receive the proceeds without having to wait for probate. Some policies are designed so that the proceeds match the estate inheritance liability of he estate. Such schemes can be a valuable way of protecting the family home from having to be sold to pay for death duties.
A Discounted Gift Trust sidesteps the Gift With Reservation Rule by effectively creating two products for tax purposes. The first part of the premium is standard life assurance as explained above. This part is ringfenced to keep the tax benefit intact. The second part s a type of investment which pays a lump sum during lifetime.
Coman & Co. can review Will and inheritance tax arrangements and advise on the tax implications.