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Term assurance offering seeks to meet inheritance tax liabilities

Insurer AIG Life is aiming to tackle inheritance tax liabilities for individuals by enhancing its term assurance policy and launching a Joint Life Second Death option as an alternative to whole of life insurance for couples who plan to gift assets away and erode their IHT liability by a certain age.

An additional option allows customers to carve out a ‘gift inter vivos’ plan from the existing sum assured, without the need for further health or lifestyle questions. This can pay the reducing IHT liability on any gifts made over the term of the insurance.

The gift inter vivos structure allows a policyholder to buy additional term assurance policies lasting 3, 4, 5, 6 and 7 years which are each worth 20% of the inheritance tax liability – the amount someone might have to pay in inheritance tax if the policyholder died that year. If the insured person dies within the seven years, the insurance paid will cover the IHT liability provided it is written in trust.

Whereas a common approach to funding a IHT liability has been to put a whole of life plan in place that pays out for – or covers - the liability at the end, this term approach reflects the fact that many advisers are helping clients reduce their liability over their lifetime.

A way to reduce IHT liability is to use Business Relief. As AIG explains, shares in qualifying businesses – such as private companies not listed on a stock exchange or firms listed on the Alternative Investment Market (AIM) – attract 100% Business Relief providing they have been held for at least two years at the time of death. There is of course a risk. If the shareholder dies within that two years and the value of their estate is more than the IHT nil-rate band, the investment is subject to 40% tax.

AIG has reduced the minimum term on its term insurance to two years to meet the needs of individuals investing in Business Relief-qualifying schemes. The two-year term is also available on a joint life single death basis for joint applications.

Andy Roberts, Technical Sales Manager at AIG Life said: “Using life cover for inheritance tax planning is not always as simple as taking out a Whole of Life policy and then forgetting about it. Financial advisers proactively help clients reduce their liability over their lifetimes and the developments we are announcing today dovetail with that approach.Business-Relief qualifying schemes are an increasingly popular way to reduce an IHT liability, but it is important to remember life cover is still required, even if it is only for a two-year period.”

 

 IHT rates on gifts

Number of years since gift given and death occurs

Taper Relief

IHT rate

0-3

0%

40%

3-4

20%

32%

4-5

40%

24%

5-6

60%

16%

6-7

80%

8%

7+

100%

0%

 

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