Q:I have 2 daughters who will inherit equally. I have taken out equity release on my property, currently worth around £450,000 and have a term assurance policy with 14 years to run to more than cover the equity release made out in trust to both the girls.
Am I right in thinking that the policy does not form part of my estate and therefore will not be liable for inheritance tax (IHT)? Am I also right in thinking that IHT will only be payable on the remaining value of the property after the equity release has been repaid even though this will be done by means of the insurance policy?
FW Edinburgh
A: As the proceeds of the term assurance plan you have effected are written in trust for the benefit of your daughters, you are correct that if you die within the term, and premiums are paid to date, the sum assured will be paid in full as a cash lump sum and should not form part of your estate for IHT purposes. As your daughters are selected beneficiaries, the lump sum received can be paid by the trustees to them directly.
I am assuming that your daughters have reached the age of majority – if this is not the case assets due to them may continue to be held in trust for their benefit. Please note that any premiums paid will be classed as gifts, which will have to be considered when assessing your overall IHT position.
I assume that your equity release arrangement was made by way of a lifetime mortgage as you suggest that there is an ongoing debt.
Here, the capital paid to you plus interest rolled up to the date of death would be payable to the equity release provider directly. As you plan to fund this liability from the life assurance proceeds, it would become necessary for your daughters, as beneficiaries, to redeem the loan if there were insufficient assets elsewhere in your estate to repay the lifetime mortgage.
This could potentially be problematic as they would not be compelled to do so.
It may be beneficial to place a letter of wishes with the trustees, directing them to use the policy proceeds to repay the lifetime mortgage if required to avoid any issues.
My other concerns revolve around the use of a term assurance policy. You appear confident that the sum assured of the term assurance plan would more than cover the equity release liability. As the debt rolls up it is constantly increasing and the final liability will depend on when you die and could be significantly more than you are budgeting for. In addition, if you survive to the end of the term, the policy will expire for no value.
This would seriously impact on the net value of your estate and may mean that the house has to be sold to fund the IHT Liability.
I would suggest that you look at the terms of the policy to establish whether it contains options to either extend cover or to convert into a more appropriate form of assurance such as whole of life, where the term of the cover would be your lifetime. If this is not possible, subject to you being able to obtain life cover, you should consider effecting a whole of life assurance policy to complement or replace the existing term assurance.
• Stephen Hall is a wealth manager within Cornerstone Asset Management LLP.
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