Preserving Family Wealth: Life Insurance as an Inheritance Tax Solution

Read Time: 4 Minutes

In this edition of Advisor Insights, I want to delve into the complexities of the inheritance tax and to enhance your expertise in HNW life insurance solutions.

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I've witnessed first hand the challenges that arise with inheritance tax, especially for high-net-worth individuals worldwide, when planning to transfer their assets to their next generation.?

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Focusing on the UK, where UK Inheritance tax can be traced back to the 1890s and now currently stands at 40% (after tax allowances) of the client’s estate value. This was charged to UK residents, but as time passed, the UK Government started taxing non-UK domicile people and from April 2017 closed off all potential tax mitigation structures. Which means anyone in the world, that owns a UK property will be subject to tax. The UK does offer exemptions of up to 325k, however, this is generally not material of most HNW clients of the world.

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Many wealthy individuals from around the world invest in properties in the UK, but they often don't realize that when they pass away, their beneficiaries will have to pay a large inheritance tax. Selling the properties to cover this tax isn't always possible, so they might have to sell other valuable assets at a loss to generate enough money. The UK tax authorities also require the tax to be paid before transferring the property to the beneficiary, and if it's not paid on time, they can sell the property to get the money ?While the UK does allow gifting of assets, there is a 7 Year rule in which there are still IHT due upon the passing of the gift giver based on a tapered formula. ?We would encourage clients to speak to a tax advisor to get up to date information regarding the current regulations.?

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Imagine a scenario where someone has ￡20 million home, and everything seems perfect, until registered owner passes away leaving the property to the next generation. The UK tax authorities will contact the estate trustees stating they need to collect ￡8 million in inheritance tax. The family may not have that kind of liquidity readily available. As a result, everything becomes frozen and entangled in the probate process. It's a distressing situation where they're forced to sell or take out profits from an appreciating asset just to cover the hefty taxes.

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However, there is a solution: using life insurance to offset the inheritance tax and preserve the assets. By strategically utilizing life insurance policies, high-net-worth individuals can ensure that their beneficiaries receive the full value of their inheritance without the burden of excessive taxes. Life insurance provides the necessary liquidity to cover the inheritance tax bill, allowing the family to retain their property and other valuable assets.

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It's crucial to educate the next generation about the consequences of inheritance tax and the importance of proper planning. The children might be blissfully unaware of the potential tax implications associated with their family's wealth. They could be content with their ￡20 million home, not realizing that a significant portion could be lost due to inheritance tax. By implementing a well-thought-out life insurance strategy, these families can protect their assets, preserve their legacy, and ensure a seamless transfer of wealth to their loved ones.

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The key takeaway here is that proactive planning and utilizing life insurance can mitigate the impact of inheritance tax, safeguard valuable assets, and prevent unnecessary financial hardships for future generations.

Shah Mohammad

International Marketing Director