Underinsurance risk to family inheritances

November 22nd 2021

UK families are being warned that soaring house price inflation could risk life cover shortfalls for inheritance tax bills.

With property values continuing to hit record highs, homeowners are being urged to review their life insurance policies to ensure their cover is adequate.

Despite the stamp duty holiday ending and rates returning to pre-Covid levels, house prices continue to rise, meaning inheritance tax (IHT) liabilities are increasing and more estates are being dragged above the tax-free inheritance threshold of £325,000.

The situation has been exacerbated by the government’s decision to freeze the nil-rate band threshold until 2026. Latest HMRC figures show a six per cent increase in the average IHT bill, which now stands at almost £210,000.

Whole of life insurance policies offer a good solution to offsetting the cost of this unwelcome financial burden, by covering the full cost of the inheritance tax bill.

As the policies represent long-term purchases, however, they will often be taken out and then forgotten about, making it essential that they’re reviewed to ensure that the sums assured are adequate and that the trust and trustees are up-to-date.

In some cases, sums assured are index-linked to cover the increases in the value of estates, but these will often be capped and may be insufficient.

Underinsurance is consequently a serious risk and families that fall foul of this inflationary environment can suffer a significant dent to their wealth. Although people may wish to leave their assets to their children, without proper planning the biggest beneficiary of their estate could in some cases be HMRC.

In the tax year 2021/22, IHT is set at 40 per cent on the value of estates over the nil-rate band or personal allowance. Where estates are passed on to direct descendants, the threshold can be up to £500,000, with two tax-free allowances applying – the basic IHT allowance and residence nil-rate band.

Where at least 10 per cent of an estate is being left to charity, the IHT is reduced to 36 per cent.

For those concerned about how they will be impacted by potential shortfalls, now is the time to act. It can be complicated, so independent financial advice should be sought to ensure the right decisions are taken.

Please note, this article does not constitute any form of advice, representation, or arrangement by Lycetts Financial Services. Independent financial advice should be taken from a firm and adviser appearing on the FCA Register.

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