IHT may still be due but the liability could be covered by a simple insurance policy that will pay out death benefits that can be used to pay the IHT liability (see case study).
Insurance protection can, in many cases, be a cheaper and simpler alternative planning tactic. Insurance protection is non-contentious, whereas other planning mechanisms may fall foul of the general anti-avoidance provisions contained in the draft legislation.
Case study
Henry, 55, is a resident of Hong Kong and domiciled there. He owns a property in London valued at £2m, with no mortgage. His son, who works in London, currently resides there and pays Henry rent.
Henry also stays at the property when he is visiting London. He owns the property via a BVI company, of which he is the sole shareholder.
He plans to sell the property eventually but if he dies in the meantime, he has left the shares in the BVI company to his son.
Running costs for the company are around £2,000 per annum.
Since 2013, Henry’s company has been subject to ATED, which Henry has been happy to accept as the potential IHT savings justify the tax and running costs.
However, Henry will no longer benefit from the company structure from an IHT perspective after 6 April 2017. This means that should Henry die after 6 April 2017, the cost to his estate will be £670,000 (2,000,000 – 325,000 x 40%).
Henry decides to ‘de-envelope’ the property and effect a 20-term policy with a sum assured of £670,000, costing £6,390 per annum.
Assuming there are no changes to costs and rates over a 15-year period, the savings are as follows:
GBP/£
Company running costs (2,000 x 15) 30,000
ATED (23,350 x 15) 350,250
Total 380,250
Total Insurance cost (6,390 x 15) if de-enveloped 95,850
Saving 284,400
Furthermore, should Henry die within the policy term, the life assurance will cover the IHT bill, which means his estate can be left to his son intact.
