Life Insurance for Gift Planning 2023

In the UK there are times where the money you give to someone can be taxed, if you die within seven years of giving them the money. A lot of people do not realise this and it’s easy to end up in this situation without realising it.

At the moment the UK government are potentially making changes to inheritance tax percentages, so it’s a good idea to keep an eye on things and see if this affects your insurance needs.

Giving money to another person isn’t always as simple as you think. You can make a gift of up to £3,000 each year without triggering gift tax. This is not per person, this is the total amount that you can gift in total. This is known as an annual exemption.

Instead of this you could gift £250 to as many family members as you like. This is known as the small gift allowance. You can’t do the £3,000 gift and the £250 gifts too, it’s one or the other.

Lots of people don’t have that kind of money to giveaway, but there are times that people do have these funds and don’t realise what it can mean to their finances.

Some common examples of a gift that could be taxed:

• Money to help towards a house deposit
• Money to help buy a car
• Money to help pay off student loans
• Money just to give as a treat

You will not automatically have to pay tax if you make these gifts, but it can happen if you die within 7 years of making the gift. The amount that the person will have to pay as gift tax reduces during this time.

The tax that you pay on gifts is currently 40% of the total amount that you gifted, but it ‘tapers’ over time. Let’s look at a very basic example.

You give £40,000 to someone one year and 40% of this gift that could be subject to tax. This means that the person that you have given this money to, could potentially face gift tax of £16,000 if you die. 

The tax reduces over time like this:

• Years 1 to 3 – £16,000 gift tax
• Year 4 – £12,800 gift tax
• Year 5 – £9,600 gift tax
• Year 6 – £6,400 gift tax
• Year 7 – £3,200 gift tax

After 7 years there should be no tax due on the gift that has been made.

Quite simply the UK government wants to make sure that people are not deliberately trying to avoid tax. Let’s say that someone develops a medical condition that is life limiting, this means that they are quite likely to have a shorter life expectancy. Examples of this can be terminal cancer, Huntington’s disease and Motor Neurone Disease.

Upon diagnosis someone might decide that because they know that they are likely to die soon, that they want to start giving gifts to loved ones to try and avoid inheritance tax being paid. Or there might not be a health condition at all, it might just be that someone wants to keep their estate within inheritance tax limits so that their family keep the money rather than the government getting it.

The government do keep an eye on these things and gift tax liability is in place for these exact reasons. It’s the same if people start to try and give gifts to family to avoid care home costs. It’s called deliberate asset deprivation.

There are two main ways to set up life insurance to provide funds to help to gift taxation:

• Gift inter vivos
• Five single life term assurance policies – 20% over 7 years, 20% over 6 years, 20% over 5 years, 20% over 4 years and 20% over 3 years

Gift inter vivos is the first type of life insurance you should try and get as it does come with specific protection just in case gift tax rules change. But, very few insurers offer this insurance and if your health means that you can’t get cover with them, the five single policies with a different insurer can be a good choice.

5. Be careful with the life insurance Trust 

When you arrange life insurance for gift planning you want to make sure that the policy is placed into Trust, so that the person you have given the money to gets the pay out directly to them, and quickly. 

Each insurers Trusts are different and it’s useful to have an adviser who can make sure that the right type of Trust is chosen for you. There’s a lot that can go wrong!

A key tip is to consider what you want to happen if you are diagnosed with a terminal illness. Terminal illness claims are paid out if you are diagnosed with less than 12 months left to live. You can choose to keep this money yourself or give it to the person that you gave the gift to. It can be very tempting to keep it but it will mean that the value of the life insurance will be added to your estate, and the person you gave the gift to will not receive any funds to help with any gift tax that is due.

Our award winning advisers are here to help you make the right decisions when arranging life insurance, to give you peace of mind that the policy you are paying for is going to do what you want it to do.