We have put together an educational article with Paula Steele and Ken Maxwell of John Lamb Hill Oldridge (JLHO) to discuss another tool, which you should consider adding to your arsenal when looking at your financial plan.
Starting off with the basics:
What is Life Insurance?
Life Insurance is a contract between the policy holder (the client) and the insurance company, where the insurer must pay a beneficiary a certain sum of money upon death of the policy holder.
UK Position
Individuals in the UK have something called the Nil Rate Band (NRB), this is the amount you can pass to your beneficiaries without being taxed. Typically, any amount above this will be caught by Inheritance tax at 40%. The NRB has been fixed at £325,000 per individual since 2009.
US Position
The US has a much larger allowance at $13.61 million dollars (2024 rates). It operates in a similar fashion to the UK where any amount above this on your death will be subject to US estate tax at 40%.
How does this work as a UK/US person?
As a UK/US person, what does this mean?
Let’s take an example: if you have an estate worth $10 million dollars, this will be exempt from US estate tax on death. Being UK resident, you will be subject to the £325,000 allowance, so approximately 9.6 million dollars will be pulled into UK inheritance tax and taxed at 40%, so a tax charge of $4m (GBP equivalent of course).
Disparity in Rates
There is currently a huge disparity between the US and UK allowances. This isn’t as bad as it looks at first glance. The UK allows you to gift away an unlimited amount in your lifetime, as long as you live for 7 years after the transfer, this Is called a Potentially Exempt Transfer (PET). On the US side, any gifts you make (there are exceptions here) reduce your allowance. This has been discussed in more detail here.
How to plan for this?
Gifting is a common way to reduce your estate as is utilising tax wrappers and potentially trusts. With the latest non-dom changes, this is a little more complex, so it’s definitely worth reviewing the protection position to see if this works for you.
Protection
A financial check-up before you look at taking protection is key. This will give you the ability to define your NEED and IMPACT.
What’s the need?
In Inheritance Tax (IHT) planning, it’s the amount of IHT that will have to be paid if someone dies. For a couple this might well be zero on the first death, but all of it on the second death.
And Impact?
What will have to be sold to pay the tax and what will that leave the beneficiaries with?
There are two types of UK coverage:
Term insurance
This will pay out during the term if the life insured/lives insured both die – typically, we see this type of cover being used for clients leaving the UK where there is currently a 3-year tail if people are able to lose their UK domicile (it is very inexpensive to cover that 3-year tail and only a 3-year contract is needed). We see a lot of clients gifting assets to their children with a 7-year reducing tail. In those circumstances, we buy a cover profile that reduces in line with the liability.
Whole of Life
For the longer term, we often see clients who expect to gift in their 70s or 80s and we then model the cover, not only for the period until the gift is made, but also to cover the 7-year gift tail. For those people who envisage holding on to their assets until death, we consider whole-of-life cover, which, though more costly, offers a permanent solution for IHT.
Cost and Process
How much will it cost?
Protection is based on your personal situation (health, age, etc.) This can vary largely from one person to another and depends on what cover you would like to take out. Typically, the guaranteed whole-of-life policy is a lot higher.
What is the process of taking out Life Insurance?
You will have a 20-minute call with an underwriter and for the larger sums insured to attend a medical – by using a broker such as JLHO, they will do the leg work behind the scenes, including completing paperwork and negotiating with the insurers to achieve the best price.
How do the costs work?
Life insurance is dealt with on a transactional, contingent basis – the clients are quoted a premium which includes the payment of commission to the broker from the insurer. If the client chooses not to proceed halfway through the process, then we do not bill for our time.
PLEASE NOTE: London & Capital does not provide tax advice, our Tax and Advanced team collaborates with you and your London & Capital Adviser to structure your wealth in the most tax-efficient way possible.
