Should you consider using life insurance to mitigate inheritance tax?

It’s not a topic that anybody likes to think about—but it is important to consider your inheritance tax liability, in order to plan for your family’s future financial situation. However, if you have a global portfolio of assets, or derive wealth from property across jurisdictions, it can be a complicated field to navigate effectively.

Non-doms who own residential property in the UK should be especially cautious in light of the changes this year to the scope of inheritance tax

In July 2015, the British Government announced that an inheritance tax charge would be imposed on UK residential property held through offshore close companies. This, effectively, came into effect on the 6th April 2017, a change which has affected the many Enness clients who own UK property through offshore close companies whether those companies are owned by individuals or by trusts. Previously, non-domiciled individuals who owned residential property in the UK through offshore companies were outside the scope of UK inheritance tax.

The rules affect all non-UK domiciles and any trustees who hold an interest in an offshore company, in turn held by an offshore trust, to the extent the value of the company comes from UK residential property. The changes affect all existing arrangements—not just new purchases. It is therefore essential that those affected by these changes consider the inheritance tax implications.

But what can you do if the changes affect you?

We sat down with some of our trusted associates to find out more—and also to ask how clients could mitigate their exposure.

Jonathan Colclough, who is a partner at private client legal practice New Quadrant Partners, said: ‘this is probably the biggest change to the taxation of UK residential property in recent years. We are reviewing structures to undertake a cost / benefit analysis of the different options available (to include, at its simplest, life assurance) as a way of mitigating this tax liability. There is, unfortunately, no one solution for all.

Michael Lewis, a director at internationally known tax specialists Frank Hirth, commented: ‘In cases where IHT is difficult or impossible to avoid – such as on UK residential property – then the use of fixed term life insurance is a common mitigation tool. Sufficient insurance is obtained to cover the IHT potentially payable. Depending on the age and health of the client and the period of coverage required the cost may be significant cheaper than expected.’

Tax treatment depends on individual circumstances and may be subject to change in the future. Enness does not provide tax advice and this material has been prepared for informational purposes only. Enness can refer you to specialist property tax experts to ensure your investment runs smoothly. 

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