Joined: 09/12/2020(UTC)
Posts: 2,087
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D Bergman;324202 wrote:Rookie Investor;324199 wrote:D Bergman;324137 wrote:Keith Cobby;324133 wrote:Firstly, I would abolish IHT, but in the absence of this would abolish these discretionary (family) trusts and give everyone the same IHT cliff edge on death. A payment of 6% each decade affords the very wealthy the planning opportunity denied to the rest of us, or increase the 6% to 10%+. As usual this budget has affected the middle class most adversely. Let me suggest a solution: Buy life insurance which can be written in trust (so outside your estate for IHT purposes), to cover expected IHT. I assumed a single male, aged 34, with assets of £1.2 million. It took me 5 minutes to check 2 of the main UK insurance companies, and for example, I based it on a 34 year old male, insurance of £350K (which is the IHT for the £1.2 million estate) and valid for 40 years. The cost was about £35 per month, or say £420 per year. Obviously this would cost more the older you are: a 25-year policy at the age of 64 would cost £5,000 per year (Legal & General online would only offer cover up to the age of 89). Even for the 64 year old, 10 years' payment would be £50,000, while the Duke of Westminster's 6% payment on the same £1.2 million estate would work out at £72,000! I am sure you could find an insurance policy better suited to your situation, with whole-of-life cover, but I have other things to do tonight. So what are you complaining about? But presumably the duke of westminister pays the 6% at the end of the 10 years, whereas your insurance is paid annually? So the difference, on a PV basis considering opportunity costs would be less than [72k - 50k] - depending on the interest rate. On your example of taking out the life insurance (350k value, 5k annual premium), it doesn't seem a good deal as you might think (in terms of overall benefit) if life expectancy is reached. Indeed assuming a 5% interest rate (roughly the yield on a 25 year gilt) and assuming a time till death of 25 years, the PV of the value of the payout is £100k, whereas the PV of the premiums paid out is £70k. A net benefit of only £30k - or £60k if you adjust for the iht you would otherwise have to pay if you did not out the policy). Better than the alternative of taking out no insurance, sure. But good to keep in mind that there is a real significant cost to taking out the insurance, depending on how long you live. Lower the time of death, the value for you as an insurance holding obviously increases, as does lower interest rate used in the calculation. (the reason why insurance companies tend to do well in rising rate environments - one of the main reasons why i started buying Berkshire in 2021/22). My post was somewhat tongue in cheek. I was replying regarding posts that brought up the slightly tiresome (to me!) point about the large estates in the UK not paying IHT. They effectively do pay IHT, but on a rolling basis. I was trying to show that many "ordinary" people could figure out ways of inheritance planning that would help with the IHT issue. For example, we are looking at gifting our children all the tax-free cash from our SIPPs - about £250K. Even at our ages (75) I can buy a 7-year term life insurance policy, costing about £10K over the 7 years till the gift is outside our estate for IHT. (the policy would be for £100K = 40% of £250K). So in effect, our children would get £250K free of tax at a cost to me of £10K. The alternative would be 40% IHT and then marginal income tax, which would be a total cost of between £130K and £167K (depending on if they take the money as income over time or as capital). I am aware (as another poster mentioned) that not everyone can get affordable insurance easily, but this is just an example.. Yes life insurance seems to be much more useful to cover unexpected early death and facing the situation that your gifts will be liable to IHT. So expected to be a negative in terms of profitability, but at least it hedges you against the cliff edge scenario of having to pay out large amounts on taxes.
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