Gregor Sked – Senior Protection Technical Manager at Royal London, explains why understanding the nature of an inheritance tax liability is key to selecting the right protection solution and supporting a client’s wider estate planning goals.
Not all inheritance tax liabilities are the same. Understanding whether an exposure is permanent, temporary, reducing or linked to a recent gift can help paraplanners identify the most appropriate protection solution.
When looking at a client’s family tree, paraplanners will often identify a range of estate planning opportunities. Conversations tend to focus on gifting strategies, trusts, business relief, agricultural property relief, pensions and succession planning. Yet one tool is often overlooked, protection.
The challenge for paraplanners is rarely identifying an inheritance tax issue. More often, it is determining which protection solution best aligns with the client’s wider planning strategy.
A simple starting point is to understand what the client is trying to remove from their estate and over what timeframe.
What is never leaving the estate?
Some assets are likely to remain within the estate throughout life.
The main residence is often the obvious example. While downsizing may occur, many clients have no intention of gifting or disposing of their home. Other assets may also be retained because they generate income, provide security or hold significant emotional value.
Where the inheritance tax liability is expected to persist indefinitely, a guaranteed whole of life policy will often be the most appropriate solution. The objective is straightforward: provide a guaranteed lump sum on death to meet an anticipated tax liability.
When appropriately written in trust, proceeds can normally be paid outside the estate, providing beneficiaries with immediate access to liquidity without increasing the inheritance tax problem the policy was intended to solve.
What is likely to leave the estate before age 89?
Not every inheritance tax liability is permanent.
For example, a married couple in their early sixties who owned a substantial buy-to-let portfolio. They fully intended to pass the portfolio to their children, but not immediately. Their expectation is that gifts would be made gradually during their late seventies and early eighties.
In that scenario, the inheritance tax exposure might exist today, but it might not be expected to exist indefinitely. If the couple survived long enough to implement their gifting strategy and the gifts fell outside their estates, much of the liability would disappear.
A joint life second death term policy might align closely with that objective particularly if protection is only required for the period during which the liability is expected to exist.
What is reducing over time?
Some clients have a clear plan to mitigate inheritance tax but have not yet completed the journey.
They may be making regular gifts, implementing trust arrangements, reducing asset values or gradually transferring wealth between generations.
In these circumstances, the liability may reduce progressively rather than disappear immediately. A reviewable whole of life policy can sometimes provide a practical interim solution, offering cover while the planning strategy takes effect.
The key point is that the protection recommendation should reflect the expected shape of the liability. If the inheritance tax exposure is reducing over time, the protection solution should be capable of evolving alongside it.
What are they gifting now?
Potentially exempt transfers create another distinct planning challenge.
Clients are often comfortable making substantial lifetime gifts but remain concerned about what happens if they die during the seven-year survival period. The gift may have left their control but could still create an inheritance tax liability for beneficiaries.
This is where gift inter vivos planning continues to play an important role.
Rather than replacing the value of the gift itself, the objective is typically to provide funds to meet the inheritance tax liability that may arise if death occurs before the gift becomes fully exempt.
The use of trusts becomes particularly important here. Ensuring policy benefits are directed appropriately and remain outside the donor’s estate is often every bit as important as selecting the right type of cover.
Don’t forget the trust planning
The protection recommendation is only part of the solution.
One area paraplanners can add significant value is by considering how policy benefits should be held.
While beneficiary nominations can be appropriate in some situations, trusts often provide greater control, particularly where inheritance tax planning, vulnerable beneficiaries protection or multigenerational planning is required.
Properly structured trusts can also help ensure funds are available quickly and outside the estate when beneficiaries need them most. Protection and trust planning are often at their most effective when considered together.
An opportunity hiding in plain sight
For paraplanners, this creates an opportunity to ensure protection is a key estate planning tool. So, remember the question isn’t whether there’s an inheritance tax liability today, but whether that liability is permanent, temporary, reducing or linked to a recent gift.
Answer that question first and the protection solution often becomes much clearer.
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