Whole life assurance: the quiet solution to the IHT landscape

IHT and the cashflow crisis

Dealing with an estate after a loved one has died can feel complex and overwhelming. And there can be financial pressures too.

That’s because any IHT due on an estate must be paid to HM Revenue and Customs (HMRC) by the end of the sixth month after the death. If the IHT isn’t paid by this deadline, interest starts to accrue daily, at the Bank of England’s base rate plus four percentage points.

Experts say this problem is likely to become even more complex from April 2027. This is when pensions will form part of someone’s estate for the calculation of IHT.

This change could push out the timelines even further, due to the complexity of pension calculations and transfers, causing families additional stress as they race to crystallise assets to pay the IHT bill.

Earlier this year, parliament rejected a proposal from the House of Lords to extend the IHT payment period from six to 12 months. The Lords argued that six months may not be enough time to locate multiple pension pots.

Applying and receiving grant of probate can also take longer than the six-month period within which an IHT bill is due.

Niki Patel, tax and trusts specialist at St. James’s Place, says: “For some people, dealing with a loss may come with an enormous administrative burden on them. Obtaining grant of probate can sometimes take far longer than the deadline to pay IHT.”

“When liquidity becomes a problem, the options available are rarely the most financially efficient.”

Pitfalls of the IHT deadline

Your family may have to make difficult decisions about how they meet an IHT bill after you’ve gone.

This can cause problems, as Niki points out: “When under pressure, families often look to fund their IHT liabilities by selling assets, dipping into their savings or borrowing.”

While doing this may solve the immediate problem, it may not be the most appropriate long-term solution. For example, being forced to sell assets, such as equity funds or shares, under pressure, can mean accepting a lower price due to poor market timing.

It’s also important to remember that the sale of an asset (to pay IHT) may trigger a capital gains tax liability.

Similarly, borrowing to fund an IHT bill comes with costs and risks, particularly given the uncertainty around future interest rates.

A quiet solution to help loved ones

If you know your estate will have an IHT liability, whole of life assurance is one way to help your loved ones meet the bill – and pay it before the HMRC deadline.

This can remove stress and anxiety for your family at what is likely to be a difficult time. 

IHT is paid at a flat rate of 40% over and above the relevant nil rate band threshold on an estate. The maximum nil rate band threshold will vary, depending on your circumstances. But for married couples and civil partnerships, where a couple passes on a main home to immediate beneficiaries, such as children or grandchildren, the total threshold can be up to £1 million.

Whole of life cover is a type of assurance protection policy which provides a guaranteed payout on death, whenever that happens. For couples a joint policy can pay out on the first or second death, whichever best suits your needs. There are pros and cons to each type, so seeking advice can be helpful to work through your options.

One of the major advantages of whole of life assurance is that policies are typically written in trust. This simple legal arrangement means the proceeds usually sit outside the policyholder’s estate for IHT purposes.

This means the proceeds are usually paid quickly to your loved ones following a claim. They won’t need to wait for probate before accessing the money and it can be used to meet an IHT liability as soon as that is needed.

But whole of life assurance policies are not suitable for everyone. You’ll have to pay the premiums for life, which in some cases may mean a commitment lasting several decades.

Cost is also an important consideration. If you are older or in poor health you may find premiums are expensive. This is because insurers price policies based on how long they expect the policyholder to live – or more importantly, how much they’ll pay in premiums over their lifetime.

Part of a bigger picture

A whole of life assurance policy can form a core part of your wider estate planning. It can ease the administrative and financial burden on your loved ones after your death, particularly if your estate is large and the assets are complex and illiquid.

But it is an option that needs careful consideration, looking at the relative pros and cons in your own personal circumstances. Talking to a financial adviser can help clarify your options.

Niki adds: “Many estate planning tools aim to reduce a future IHT bill. But a whole of life policy addresses a different challenge, one that should be considered when making an overall financial plan: to ensure that the money to pay the bill is available when it’s needed, regardless of how illiquid an estate may be.”

“This is why protecting the future should always be a core part of the financial planning conversation.”

Trusts are not regulated by the Financial Conduct Authority.