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ACCA Strategic Professional · Advanced Taxation (UK) · Inheritance tax: administration and payment, including the instalment option

Ms Khan has a taxable estate of £1,000,000 with no available reliefs and no residence nil rate band. She wants to ensure funds are available to pay the IHT liability without increasing her estate. She proposes a life assurance policy to cover the tax. Which approach is the most effective for IHT planning?

The best approach is to write the life policy in trust for her beneficiaries. The proceeds then fall outside her estate, so they are not taxed at 40%, and they can be paid out quickly to fund the IHT without waiting for the grant of representation.

  1. AWrite the policy in trust for her children, so the proceeds fall outside her estate and are available quickly to pay taxCorrect
  2. BTake out the policy for her own benefit, so the proceeds fall into her estate
  3. CAssign the policy to her executors only on death
  4. DPay the premiums using her annual exemption without placing the policy in trust

Explanation

A policy written in trust keeps the proceeds outside the estate, so the policy does not itself add to the IHT and funds are available promptly without waiting for the grant. A policy payable to her own estate would be taxed at 40%. The premiums may also be exempt as normal expenditure out of income or by using annual exemptions.

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