Latest news with #inheritancetax
Telegraph
15-07-2025
- Health
- Telegraph
Scrap ‘unfair' inheritance tax on infected blood scandal victims, Labour urged
An 'unconscionable' oversight that will see victims of the infected blood scandal pay inheritance tax on compensation payments must be scrapped, expert lawyers have urged. Two professional bodies representing lawyers and advisers have been in discussion with HM Revenue and Customs (HMRC) about fixing an issue that results in families of the infected 'unfairly' paying inheritance tax on compensation payments. About 30,000 people contracted HIV and hepatitis C in the 1970s, 1980s and 1990s after being given contaminated blood products. The Government set aside £11.8bn for the victims last year, and promised the compensation payments would be free from inheritance tax. But in practice, only the first payment to the victim or the victim's estate escapes the 40pc charge. So-called 'second' transfers do not. This means that if a victim died years ago and their estate now received compensation, that sum would be subject to inheritance tax when the person inheriting their estate also passed away. The Government has taken so long to compensate the victims that many of those affected are now in their later years. As a result, some could pass away soon after receiving compensation. This could then lead to their families paying back 40pc of the sum to the Government. The Association of Lifetime Lawyers and the Society of Trust and Estate Practitioners (STEP) have sent a report to HMRC and a letter to the chair of the inquiry pushing for a solution through the introduction of secondary legislation. Jade Gani, of STEP, said: 'We will continue to work with HMRC, the inquiry team and other partners to ensure the law changes as swiftly as possible, and are encouraged by the progress so far. 'We hope that the Government will act swiftly to ensure that bereaved families aren't unfairly penalised at such a difficult time.' In a damning report published this week, the inquiry chair, Sir Brian Langstaff, warned that victims had been 'harmed further' by injustices in the compensation scheme. The latest figures from the Infected Blood Compensation Authority show that so far only 460 people have received compensation payments, worth hundreds of thousands, and sometimes millions, of pounds. The inquiry has not referenced the inheritance tax issue in its reports so far. However, 'many infected and affected parties' could be impacted, according to the lawyers. The Telegraph previously highlighted the problem in April. One woman in her late 60s said she was entitled to £1m in compensation through the estate of her brother who died in the 1990s after being infected with HIV. But under the current rules rules, her family would be hit with a £400,000 bill if she died following the payout. She said it was 'completely morally wrong' that inheritance tax should be applied to her brother's compensation. In the letter sent to Sir Brian on July 10, Ms Gani wrote: 'Compensation for infected blood scandal victims should never be taxed, whether in life or death.' She continued: 'Given that one of the most damaging aspects of the infected blood scandal has been how exceptionally long it has taken for government bodies to acknowledge the harm caused and provide redress, and we continue to see delays with compensation payments being issued, we believe it to be highly unconscionable that those infected and affected should be negatively impacted by tax technicalities only created by such a long delay in making these payments.' Sir Brian has called for an overhaul of the compensation scheme. He made several recommendations in his report including that victims should be allowed to apply for compensation rather than having to wait for an invitation, and that older or seriously ill victims and family members should get priority. A government spokesman said: 'The victims of this scandal have suffered unspeakable wrongs. We have designed a comprehensive compensation scheme and so far, have paid over £300m to victims. 'Infected and affected victims are not taxed on their compensation. But, like many other compensation schemes, intestacy laws apply.'
Times
14-07-2025
- Business
- Times
Surge in wealthy using insurance to beat inheritance tax hit
Wealthy families are using life insurance policies to beat Rachel Reeves's inheritance tax raids. Brokers and financial advisers have told The Times that they have seen enquiries about life insurance policies for inheritance tax purposes more than double since the chancellor announced a wave of reforms to the system in October. Life insurance is expensive but it will pay out a lump sum on death and the policy can be put in trust, so it's outside the estate for inheritance tax (IHT) purposes, and can be set up to automatically pay off any IHT bills. Edward Durell from the life insurance specialist Cover Direct said: 'We have seen a huge increase in the number of people asking in the last few about using life insurance policies as cost effective way to mitigate IHT, I would say these are up by about 100 per cent. 'There are a lot of positives to these policies as it will immediately pay out and cover that IHT bill, meaning there is no need to sell property, or get into difficulties paying it.' In her first budget in October, the chancellor announced changes to agricultural property relief and business property relief systems so estates or companies would now have to pay 20 per cent inheritance tax on assets above £1 million from April 2026. Previously these businesses had been exempt from any inheritance tax regardless of the size of their estate. Mike Strutt from Risk Assured, another life insurer, said these changes had resulted in a doubling of the number of enquiries it had seen from customers looking to take out lifetime insurance policies to help soften expensive bills for relatives. Strutt, whose company specialises in providing policies for inheritance tax purposes, said because the legislation had not been published yet, many of those had not yet signed up to these policies. 'Most people won't put that cover in place yet but we are encouraging people to get their ducks in a row so they are ready to roll when they do. We expect there to be a big wave of people taking out policies when the IHT changes come in,' he said. The increase in inquiries is largely driven by those looking to take out whole life policies, or life assurance, which sees people pay a monthly premium that will pay out a lump sum on death, regardless of what age you die at. • Why a wealth tax won't work The insurance broker LifeSearch said that sales of whole life cover had increased 230 per cent since last autumn, while other companies have reported similar increases in those taking up Chris Etherington from tax specialist RSM said that life insurance policies were particular for businesses and farms who would have most of their estate tied up in illiquid assets like property or farms, which can take some time to sell after death. 'A lot of people are thinking, as long as the premiums aren't too excessive, they should probably take out a life insurance policy to meet these inheritance tax bills,' he said. He added that many people that were not business owners and farmers were also now looking to see if they could be used to help cover any liabilities those inheriting their estate may incur from unused pension pots. As part of her IHT reforms, Reeves also announced that from April 2027 unused defined contribution pension pots would also become subject to inheritance tax. 'More and more people are looking at their pension pots and wondering whether to withdraw, but then decide to take out life insurance to cover the potential bill,' Etherington said. • Inheritance tax on pensions could destroy thousands of family businesses There are three types of insurance that can cover inheritance tax liability: whole of life policies; 'gift inter vivos' policies, covering specific gifts rather than someone's entire estate; and term insurance covering set periods, often ten or 20 years, or until the age of 90. Sean McCann from insurer NFU Mutual said they had more business owners looking at gift inter vivos policies to protect gifts to loved ones from tax bills. These policies last for seven years after you give an asset to someone (after which it would fall out of your estate for IHT purposes anyway), and will payout to cover the bill if you die before the end of the policy term. McCann said: 'We are seeing more people giving away assets and they'll often take these seven-year policies, including one owner of a £5-million business who wanted to hand over shares in it to his children.'
Telegraph
13-07-2025
- Business
- Telegraph
‘I'm paying thousands of pounds to protect my children from inheritance tax'
Paul Hiatt is spending hundreds of pounds a year on life insurance to protect his children's inheritance from falling into the clutches of Rachel Reeves. Hiatt first took out a policy eight years ago, but was forced to take another deal out shortly after the October Budget, Labour's first in 14 years. 'Our pensions are now a cash cow for the Chancellor,' he says. He is one of thousands of families across Britain attempting to shield their hard-earned money and mitigate a large inheritance tax bill. Financial advisers say life insurance policies designed to pay off tax bills were traditionally seen as a 'last resort or sticking plaster' due to expensive premiums. However, Labour's premiership has 'triggered a renewed surge in interest', says David Little, of financial planner Evelyn Partners. Some policies are specifically designed to meet death duties that may be due on gifts under the 'seven-year rule' (see more, below), while others simply pay out a cash amount that can be used as the family sees fit. So, should you follow suit and take evasive action now, parting with large sums of cash today to potentially avoid larger sums in the future? How life insurance can reduce your bill From April 2027, private pensions will become part of a person's estate and therefore be liable for inheritance tax. This will add substantially to the amount of inheritance tax HMRC collects. Reeves also targeted family businesses and farmers. Inheritance tax will be charged on 50pc of the value of business or agricultural assets above £1m from April 2026. Hiatt, who lives in rural Warwickshire, spent 46 years working in the water industry as a project manager and retired nearly three years ago. The 67-year-old has one life insurance policy with Scottish Widows, costing £500 a year, and one with Vitality Life, costing £717.24 annually. They are 'term' policies, meaning a lump sum is only paid to his beneficiaries if he dies before his 90th birthday, and each payout is fixed at £50,000. He wants to leave his estate to his two children, who are 24 and 30. If a life insurance policy is written into a trust, it is counted as outside of a person's estate, and the lump sum can then be used to pay an inheritance tax bill. Sometimes this is done automatically, but in other cases, it is up to whoever takes out the policy to make sure it is written into trust. Millions of pounds a year are needlessly handed over to HMRC in extra inheritance tax because this simple decision has not been taken. Premiums vary depending on your age and other factors, such as whether you smoke. As the chances of dying sooner are far greater, policies for over-65s are usually significantly more expensive than for younger customers. The average inheritance tax bill paid by estates has increased from £199,000 to £243,000, according to LifeSearch, a broker. It said a 60-year-old non-smoker can expect to pay £431 a month for whole of life cover of £300,000. For an 80-year-old, this soars to £1,413 a month. On the other end of the scale, a 30-year-old buying a whole life policy would currently pay around £9.39 a month, with a £10,000 payout. If a 30-year-old wants a policy that will pay out £100,000, it will cost £54.20 a month with Legal and General, at today's rates. Sales of whole of life cover, also known as life assurance, have increased more than threefold since last autumn, says insurance broker Justin Harper. Harper, of LifeSearch, says: 'We have seen a noticeable rise in the number of whole of life policies being taken out specifically to address inheritance tax planning, driven by both adviser recommendations and customer-initiated enquiries. A fixed amount of cover or cover that rises with inflation are available, Harper explains. The latter might be chosen as the potential tax liability is likely to increase over time. If you are younger and planning ahead, term insurance can be 'more cost-effective in the short term'. However, Katie Ridland, of wealth manager St James's Place, advises clients to opt for whole of life policies because 'you can't plan the date of your death'. Both policies mean your family does not have to wait for probate, the money is released quickly and allows them to pay inheritance tax without delay. 'The best day to take out life insurance was yesterday,' adds Ridland. 'It's the two inevitable things that people don't want to talk about – death and taxes – but we need to talk about protection from an early age.' After the Budget left him 'gobsmacked', Hiatt also decided to give money away to his children. Unlimited sums of money can be given away without being liable for inheritance tax if they are made out of income, are part of normal expenditure and leave the donor enough money to maintain a normal standard of living (see more on the valuable unlimited gifting rule here). The donor must live for seven years after giving the money to avoid a tax bill if they are leaving behind more than the tax-free allowance. 'I've got a substantial amount in a defined contribution pension pot, and I have also benefited from a final salary benefit scheme as well, so I count myself very lucky,' Hiatt says, 'but the Budget certainly put the cat among the pigeons. I'm really disappointed.' Families can also use an insurance policy to protect these gifts from inheritance tax. A gift inter vivos insurance can be used to shield a loved one from paying the levy on money or assets if you pass away within seven years of gifting. Tony Müdd of St James's Place says this is growing in popularity and is a 'simple and effective solution' to covering unexpected tax liabilities. 'Better ways of saving inheritance tax' However, life insurance policies are 'by no means a silver bullet', Evelyn Partners' Little says. Mike Warburton, The Telegraph's tax expert, warns they are only 'appropriate in the right circumstances'. He adds: 'I am not keen on whole life policies, which are expensive and do not reduce the overall tax burden. In my view, there are better ways of saving inheritance tax.' Savers can put other assets into trusts to protect them from death duties, as well as giving money out of surplus income, as explained above. Warburton says there is a risk that elderly people will enter into a commitment to make regular premiums and 'subsequently run into a problem if they have expensive care needs.' Little says: 'Whole of life insurance plans were seen somewhat as a last resort, or a sticking plaster until financial planning evolved. This was mainly due to the cost of the premiums, which can be very expensive, especially if health concerns are present. 'However, the October Budget introduced pensions into the estate calculation from 2027, triggering a renewed surge in interest from clients in these policies. When written in trust, they can provide a tax-free lump sum for children or other beneficiaries outside of probate, enabling the inheritance tax liability to be cleared, leaving the other assets intact and ready to be inherited. 'That's said, they are by no means a silver bullet. It is important that the expected total premium payable is weighed against the sum assured and life expectancy of the client.'
Telegraph
10-07-2025
- Business
- Telegraph
Britain doesn't need a wealth tax – we already have at least three
The Welsh windbag is at it again. Former Labour leader, Lord Neil Kinnock, has set hares running by suggesting the party is exploring imposing a new wealth tax on Britain. No 10 then refused to rule out introducing a levy, and the usual suspects lined up to say what a good idea it would be. On the opposite side of the debate, centre-Right economists have pointed out the obvious: wealth taxes have failed in almost all the countries they've been introduced in. It is also far from clear how wealth can reliably be valued at regular intervals when nobody has any faith that a crumbling HM Revenue & Customs (HMRC) could administer it. Stuart Adam, a senior economist at the Institute for Fiscal Studies, said: 'Taxing the same wealth every year would penalise saving and investment. 'An annual wealth tax would need to apply broadly to all assets to ensure that it was not easy to avoid. Such a tax could raise significant revenue if it applied to the bulk of the UK's wealth – that would include the homes and pensions of the middle class. 'Trying to raise large amounts of revenue from only the very wealthy would make the UK a less attractive place for those people to live.' Forgetting the practicalities, the more important point is that we already effectively have wealth taxes in this country. Death duties Unlike countries such as Australia and Sweden, Britain applies inheritance taxes on the estates of the deceased. If this isn't a wealth tax, I don't know what is – and it's getting more pernicious. The tax-free allowance has been frozen at £325,000 per person since 2009, and despite an extra allowance for passing on main homes, HMRC is collecting ever greater amounts as asset prices have risen. From April 2027, unspent pensions will also be counted as part of an estate for inheritance tax purposes, which will send receipts soaring even higher. Don't rule out more changes to death duties. It is still paid by a minority of estates and, while the very wealthy can take steps to limit tax bills, it is difficult to avoid. There is room to cut back several reliefs further, and Rachel Reeves could scrap the complicated family home allowance. VAT on private school fees It shouldn't be controversial to say that it is immoral to tax education. If someone chooses to spend their money, hard-earned or otherwise, on schooling then that should not be penalised. In an ideal world, state schools would be all brilliant, well-resourced and able to cope with all types of children. Ultimately, there would be no need for private education. To decide to fund your family's education from your own funds shouldn't be considered a 'luxury', which of course is what VAT was intended to tax. This is a wealth tax, pure and simple, driven by ideology and class warfare. Council tax premium It was Michael Gove who decided to grant councils the power to charge extra council tax on second homes. Since April, when the powers came in, local authorities up and down the country have been sending bills to shocked property owners. In some places, you could argue the dire shortage of homes for local people justifies squeezing out holidaymakers but, in many cases, this is just a way to extract more tax from those deemed 'wealthy'. Many down from Londoners (DFLs) can afford to cough up, but other families are being forced to sell properties cared for for generations, often in remote places where there is no local demand for housing. There have long been calls to reform council tax to make the system fairer across the country. Millions of homes pay higher council tax than Buckingham Palace. A Chancellor with little left to lose (know of anyone that fits that description?) could announce a once-in-a-generation redrawing of council tax, which would almost certainly hit London and the South East the hardest.
Telegraph
08-07-2025
- Business
- Telegraph
‘Could my tax-efficient investment backfire when I die?'
Ask Mike a question by emailing: taxhacks@ Dear Mike, I have an investment bond which I would like to assign to my three adult children, who are the only beneficiaries of my will. The bond has a substantial chargeable gain. If I were to sell the bond myself and distribute the proceeds, I should incur 45pc tax on it all. Hence, I would prefer to assign it. If the assignees were to sell, they pay income tax on the relevant part of the chargeable gain. Yet the full value of the bond remains in my estate and is subject to inheritance tax, unless I survive seven years. Hence, there will be a period when the assignee has sold a portion or all of the bond, and has paid income tax on it, yet my estate remains liable for inheritance tax on the original amount. Effectively, the assignee pays both taxes. Is that correct? I would be grateful for your clarification. Regards, – Roger Dear Roger, Before I answer your question, I will give an overview of investment bonds, which I hope will help other readers appreciate the issues involved. Investment bonds are strictly single premium non-qualifying life insurance policies, and are not to be confused with bonds issued by the Government or with corporate bonds. Because of the unusual tax rules, they need to be handled with care – usually with the help of a professional adviser. Nevertheless, in my view they can play an important part in financial planning. They fell out of favour for a while, partly over concerns about the level of commissions offered to advisers which was then taken directly out of the policies. However, as a consequence of recent changes in tax legislation, I think they are worthy of a rethink. Note that I am not an investment adviser, and will therefore restrict my comments to the tax issues involved. In addition, I will assume that your policy is not a personal portfolio bond, for which different rules apply. How investment bonds work Investment bonds are essentially an investment product inside an insurance policy wrapper. They are traditionally offered by insurance companies, where funds can be invested in a wide range of investments in a managed fund. They offer several unique features which can make them very attractive, in the right circumstances. Firstly, they are not governed by the normal income tax and capital gains tax rules. In particular, you can withdraw up to 5pc of the original investment each year on a cumulative basis without tax applying because this is treated as a part withdrawal of the original capital investment. It can feel like tax-free income, but it is strictly a tax deferral because the gains in the policy remain to be taxed. Ultimately, this gain in the bond can be taxed either on encashment or sale. This profit is not subject to capital gains tax, but to income tax, under rules known as 'chargeable event gains'. In calculating the income tax on the gain on UK policies, it is assumed that basic-rate tax has already been paid – but that is not the case with offshore policies. Nevertheless, in both cases, the gain is calculated with the benefit of 'top slicing relief'. In this, you divide the overall gain by the number of complete years of the policy life. You then calculate the higher- or additional-rate income tax liability on this, if any, and multiply the result by the number of policy years involved. With careful planning, it is often possible to encash the bond in a year when you are a basic-rate taxpayer or a non-taxpayer, such that for a UK bond no additional tax will be due, always assuming that this remains the case with the additional top sliced amount. This is where a major tax saving opportunity arises because, in addition to your spouse, it is possible to assign a policy to someone else without the problem of capital gains tax that would usually apply on other investments, such as shares. Suppose you assign the policy to your spouse or civil partner who is a basic-rate taxpayer. No tax applies on the transfer, and they may then be able to encash the policy free of tax using top slicing relief. That is what my father did (with help from me) by ensuring that my mother held all her investments that year in low coupon gilts, and was thereby only a basic-rate taxpayer. So, in answer to your question, Roger, you can assign a policy to your three adult children and take advantage of this tax treatment. However, it will then count as a lifetime gift of the value of the policy for inheritance tax purposes, for which the usual seven-year rule applies. If the policy is UK-based, the chargeable gain on encashment will have the benefit of a basic-rate credit. Depending on the tax position of your children, there may be no tax to pay by applying the above planning steps. If there is tax to pay on the gain, this will be on your child concerned. If you die within seven years of making the gift, this value will be added back into your estate, and any inheritance tax due paid by your executors. If the value of the policy assigned together with other gifts exceeds your available inheritance tax nil-rate band, your executors may benefit from taper relief. Possible tax complications There are some other important points I should mention. I have said that there is no tax due when a policy is assigned. That is the case for gifts, but not necessarily where a payment is involved. Also, the way chargeable event gains are calculated is very complicated and, in some circumstances, you can finish up paying income tax on part of your original capital investment. Investment bonds are almost always issued in segments to avoid this problem. The golden rule is that you must either keep withdrawals within the 5pc per annum cumulative amount allowed for each segment, or encash complete segments. If in doubt, ask a professional adviser. There have been some horrendous examples of people getting this wrong. However, as explained in the HMRC manuals at IPTM3596, this relief will only be given in very limited circumstances. I have said on many occasions that successive governments have so mishandled and overcomplicated our tax rules that even HMRC, with all its resources, sometimes fails to understand them. An example is in the calculation of top slicing relief on investment bonds. HMRC failed to understand the interaction between the existing top slicing rules and the introduction of the personal allowance taper on incomes above £100,000 and the savings allowance. It wasn't just inspectors who got it wrong, the error was built into the HMRC software. This error was discovered by Tim Good, an accountant with PTP Training Ltd, who wrote the definitive article about it in a leading tax publication in 2017. Despite this, HMRC failed to correct the error. Instead, it left the incorrect software in place for three more years until the Government changed the law to the less beneficial treatment that HMRC wanted. This law change is not retrospective, despite the best efforts of HMRC to argue otherwise in court. This was all the subject of a court case reported only last month, where Tim Good successfully supported the taxpayers in the action at no charge. He is to be commended for doing so. He also issued this wonderful statement in criticism of the delay in the process: 'In the time between the hearing on 8 December 2023 and judgment being delivered on 5 June 2025, a baby elephant could have been conceived, gestated and come into this world.' Claims for tax repayments have to be made within four years from the end of the tax year concerned. However, as a consequence of this court decision, readers who had appealed against the tax assessed in time should now claim a repayment from HMRC. Despite the official four-year time limit, it would surely be fairer if the Government and HMRC accepted their failure and agreed that all those taxpayers wrongly assessed should be fully compensated. It would also be appropriate, in my view, for HMRC to make Tim Good an ex-gratia payment as a reward for identifying their error eight years ago. Mike Warburton was previously a tax director with accountants Grant Thornton and is now retired. His columns should not be taken as advice, or as a personal recommendation, but as a starting point for readers to undertake their own further research.
