HMRC’s latest monthly bulletin shows that Inheritance Tax receipts for April 2023 to March 2024 were £0.4 billion higher than the same period last year.  Every month I have the same recurring thought when I see the figures increasing.  Why don’t people just put more planning in place to protect their wealth for their beneficiaries?

Obviously there are those that don’t want to and are content to pay some tax for the national good and there are also those that have left it a little too late and have therefore restricted their options to implement any significant planning.

Who’s actually paying the tax?

Drilling down into the figures reveals that some of the tax payable can be attributed to those who may actually have attempted to put some planning in place.  In the 2021/22 tax year, of the total £6.08 billion Inheritance Tax receipts, £42 million related to transfers to trusts with a further £237 million relating to charges on trusts (ten-yearly and proportionate charges on discretionary and other relevant property trusts).  I wonder how much of that £237m could have been mitigated had multiple trusts been used.

Even some of the remaining £5 billion+ may be attributable to those who’ve tried to mitigate the tax – those individuals who’ve made gifts in the seven years before their death or those who’ve invested in Business Relief qualifying investments but not survived the two-year qualifying period.  And then there are those who’ve successfully implemented planning but still contributed to the Inheritance Tax pot.  How can that be so if the planning has been successful?

Life cover doesn’t mitigate Inheritance Tax!

Life cover provides a simple way to address, but importantly not mitigate, Inheritance Tax.  For those individuals who are unable, or unwilling, to make lifetime gifts and those who have no appetite for higher risk Business Relief qualifying investments, life cover written in trust may provide the answer.  It offers lifelong coverage, providing a death benefit to beneficiaries whenever the insured passes away.  Whilst the concept is straightforward, the tax implications can be complex, particularly for larger plans.

Earlier this month, Royal London announced it had made changes to its underwriting limits as part of its commitment to grow the high net worth market.  It recognised that high net worth clients typically have sophisticated financial needs and are looking for high levels of cover – that mirrors my own experiences of planning with Private Clients.  A proposition that meets those needs and makes business processing as efficient as possible is certainly to be welcomed but there are other considerations beyond the initial underwriting and business processing.

What else is there to think about?

There’s the obvious consideration of how to pay the premiums tax efficiently.  To protect the sum assured from Inheritance Tax, the policy needs to be written in trust.  In the absence of more sophisticated planning, that may mean that each premium paid constitutes a gift.  For a modest policy, the premiums may fall within the £3,000 annual gifting exemption or may qualify as gifts of surplus income (although will the income always be available?)  For more sizeable premiums, it may be efficient to avoid regular gifts to trust and there are strategies which can achieve that.

Having navigated the underwriting requirements and considered how to pay the premiums tax efficiently, there’s another important consideration that may be relevant for high net worth individuals.

Is multiple trust planning necessary?

How much of the £237 million relating to charges on trusts in 2021/22 related to trusts holding whole of life plans?  By HMRC’s own admission, calculating the ten yearly charges on trusts is complex.  In the case of whole of life plans, the value is taken to be the higher of the surrender value on the day before the ten-year anniversary or the premiums paid during the ten-year period.  A single settlor trust may have a full Nil Rate Band of £325,000 but, in some cases, that Nil Rate Band will have been reduced (or eroded completely) by Chargeable Lifetime Transfers made in the seven years before the whole of life plan was written in trust.

Assuming the trust does have a full Nil Rate Band, then annual premiums in excess of £32,500 (or monthly premiums in excess of c£2,700) will result in a periodic charge at the ten-year anniversary and potential exit charges when the sum assured is ultimately appointed to the beneficiaries.  Although the purpose of a whole of life plan might be to provide funds to settle an Inheritance Tax liability, paying tax in the meantime probably isn’t part of the strategy, not least because the trustees may not have access to funds to pay any tax.

Increased HMRC focus on trusts

Since the introduction of the Trust Registration Service in September 2022, HMRC should arguably now have a complete census of all relevant trusts in existence, making it easier to identify those trusts which have tax liabilities.

Poorly planned life cover may increase tax liabilities and create foreseeable harm

The extent of ten-yearly charges, and exit charges, can be reduced or mitigated altogether through the use of a multiple trust strategy.  Failing to consider this, particularly for larger policies put in place by high net worth individuals, could be regarded as creating foreseeable harm (and therefore breaching the Consumer Duty cross cutting rule).

Ultimately, there’s no way of knowing how much of the Inheritance Tax receipts are funded by whole of life proceeds.  From my perspective, the more the better, as that means advisers are recommending planning strategies to their clients to address any IHT liabilities they have.  Similarly we don’t know how much of the ten-yearly charges relate to life cover in trust.  As an industry, let’s hope that relates to growth on investments held within trusts rather than poorly designed and executed life cover strategies.

If you’d like to discuss planning options for your clients, including how to pay whole of life premiums tax efficiently, or how to implement a multiple trust strategy, please get in touch.

Next Up: Is There Too Much Focus On The Capital Gains Tax Exemption?