Darren Berry
The Treasury’s Inheritance Tax (IHT) receipts are rising, with MoneyAge confirming that HMRC collected £6.3 billion between April and December 2024, an increase of £600 million compared to the same period the previous year. The government’s total IHT take is projected to hit £9.7 billion a year by 2028/29.
The rise is largely due to frozen allowances pushing more families over the threshold; a situation set to be exacerbated by changes to the IHT treatment of pensions expected in 2027.
As a high net worth individual (HNWI), though, tax-efficient estate and legacy planning will be hardwired into your long-term financial plan already. With the so-called “great wealth transfer” well underway, you’ll be conscious of the potential tax bill you might leave behind when passing on your wealth, and the unique challenges you face in mitigating it.
Keep reading to find out how you might employ insurance policies to your advantage, and a few other factors to consider.
Gifting and the “7-year rule”: A brief reminder
One way to lower the value of your estate for IHT purposes is through “giving while living”. Cash gifts made during your lifetime are generally IHT-free, but only if you live for a further seven years from the date the gift is made. This is known as the “7-year rule”. The gifts themselves are referred to as “potentially exempt transfers (PETs)”.
On death within three years of making a gift, IHT is payable at the full 40%, after which, tax is payable on a sliding scale known as “taper relief”.
| Years between gift and death | Rate of tax on the gift |
|---|---|
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more | 0% |
Even as a HNWI, it’s worth noting that taper relief only applies to gifts in excess of the nil-rate band, so if no tax is payable on the transfer – because it does not exceed the nil-rate band (after cumulation) – there can be no relief. Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
Thanks to the HMRC annual exemption, the first £3,000 you gift (during the 2024/25 tax year) is IHT-free and any unused amount can be carried forward for 12 months. You might be able to gift £6,000 this year if you didn’t use the exemption during the last tax year.
Also consider the “normal expenditure out of income” exemption that allows you to make ongoing gifts, in the form of regular contributions to a child’s investment, say, as long as you can prove that the gift is:
- Made from your normal income
- Is part of your usual outgoings
- Doesn’t detrimentally affect your standard of living.
Gifting might help to provide your loved ones with a living inheritance, but you’ll want to take further measures to mitigate against the 7-year rule.
Life insurance can help to cover a potential IHT liability when a gift is made
As already mentioned, if you make a large gift and then die within seven years, the gift could be subsumed by the IHT liability it attracts. Your loved one is left without the gift (or up to 40% of the gift) you intended to leave them.
One way to avoid this scenario might be for you and your family to build and keep sufficient liquid assets to cover the potential liability. Equally, though, you could use life insurance policies to cover the bill.
Careful planning might allow you to set up an insurance policy that mirrors the potential liability of a gift. The policy could even include a decreasing sum assured aligned to the IHT tapered relief. If you die within seven years of making a gift, the insurance payout will cover that gift’s liability, leaving your loved one with the full value of the original gift.
While the cost of insurance will, as always, depend on the age and health of the insured, it might be a tax-efficient way to pass on your wealth.
Certain strategies could help you to tax-efficiently (and cost-effectively) manage an IHT liability
If your potential IHT liability is set to run into the millions, or even tens of millions, it stands to reason that the guaranteed whole-of-life plan intended to cover that whole bill will be costly.
Seeking professional financial advice could help you to employ a different strategy.
You might opt to take out a whole-of-life plan to cover significant assets like property while using smaller decreasing term plans to cover the wealth you intend to gift over time.
This has the benefit of decreasing the cost of your whole-of-life cover. Each decreasing term plan will cover set periods, from ages 50 to 59, 60 to 69, and 70 to 79, say. These will likely work out cheaper because you’re covering yourself for a smaller amount, and that amount will decrease over time, as you slowly gift assets and lower the value of your estate.
Get in touch
This is just one way in which planning could help you, as a HNWI, manage your estate and legacy planning. To find out how else we can help you and to ask any questions you might have, please get in touch.
Contact us online or call 020 7400 4700.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, or will writing.
Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse. Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
