04: Strategy 3 - Use life assurance policies to fund the tax

Using a life assurance policy to fund the expected IHT bill is not really an avoidance strategy, because the policy proceeds will be used to pay the tax and will not be available to succeeding generations. Nevertheless, this is a valuable approach (and perhaps the only practical method) for those people who are asset rich but cash poor.

If you possess a reasonably substantial property or other illiquid wealth and relatively few readily realisable investments, this could be the approach for you. The younger you are when the policy is taken out the better – premiums will be lower.

You should not start life assurance policies that you will not be able to maintain.

For couples, such a policy should be structured so that the proceeds will be paid out after both spouses or civil partners have died. This is the time when the major tax liability will arise. It is also essential that the policy should be placed in trust – otherwise, the policy proceeds will form part of the taxable estate of the surviving spouse or civil partner and will suffer a tax charge.

The policy premiums are usually treated as exempt transfers, falling within your annual exemptions or perhaps qualifying as part of your normal expenditure from income.Last Updated