What is Gift Inter Vivos Insurance? | Insights from the experts

Gift Inter Vivos insurance policies cover the tax liability that would arise if death occurred during the 7-year period since a gift, above the tax thresholds, was provided.

A Gift Inter Vivos policy is essentially life insurance. These policies are put in place with the intention of using the benefit funds to cover the tax that may be required to be paid if the Giftor passes away. Tax will become liable if the Giftor dies during a 7-year window. This is known as the 7-year rule.

Gift Inter Vivos Insurance policies can be written into Trust so that they do not form part of the estate. If this is not done, it can add further tax liabilities as the estate value includes the benefit amount.

Overview of Inheritance Tax

In the UK, we have a personal allowance for inheritance tax. It is normally £325,000 but can be as much as £1,000,000 depending on what is being left in the Estate and to whom.

If when you die, your estate is over the threshold, your beneficiaries will need to pay 40% tax. This is required to be paid upfront before being awarded probate.

You can reduce your tax liability by setting up Trusts, making charitable donations, and making gifts.

How can Gifts be liable for inheritance Tax?

The allowance for making gifts is £3,000 per year. You can split this allowance via different people so long as you do not exceed this value.

You can roll over any of your annual unused gift allowance for a maximum period of 1 year.

Gifts can be defined as:

• Money
• Household goods
• Personal goods
• Antiques
• Property
• Land
• Stocks & Shares

A gift can also include the value of a discount given when you sell your home for less than the market value in a 'discounted sale'. For example, you may sell your home to your children at a 50% discount. The remaining 50% will be considered a gift.

Gifts between spouses or civil partners are considered exemptions, along with gifts to charities and political parties.

If you exceed these allowances and pass away within 7 years of making the gift, it will form part of your inheritance tax liability.

The 7-year inheritance tax Rule

If you make a gift and die within 7 years of making the gift, HMRC will consider this gift part of your estate. It will then become liable for Inheritance Tax. This is known as the 7-year inheritance tax rule. This rule exists to prevent people from gifting their entire estate to avoid their beneficiaries needing to pay tax.

If you have gifted, the value of these gifts will use part or all of your nil-band rate. The nil-band rate is the allowable threshold for IHT in the UK. If the gift value is over the threshold, it could mean the beneficiary will be liable for the inheritance tax on this.

Taper relief

Tax charged on gifts is not a flat amount throughout the 7 years. Taper relief provides the percentage of tax due and the relief available as the years pass.

The table shows the rate of tax payable based on the years between the gift date and death. 40% tax is due before 3 years, in line with the full inheritance tax rate. No tax is due after 7 years.

How does Gift Inter Vivos insurance work?

The Gift Inter Vivos is a life assurance policy. Life Assurance pays a guaranteed sum upon death. Also known as Whole of Life insurance. You can pay a monthly premium in return for a benefit amount. This premium is based on factors such as Age, benefit amount, and the length of the policy.

Life assurance benefits are generally used to cover funeral expenses and settle debts. However, in the case of Gift Inter Vivos insurance, it is used to pay the tax liability that would be due if death occurred during the 7-year period.

Gift Inter Vivos policies are set up with a fixed 7-year term. The benefit amount then reduces in line with the Taper Relief rates. This ensures that the benefit amount will always be equal to the tax liability.

This is cheaper than having a fixed benefit amount throughout the whole term. However, premiums are set up front and remain fixed throughout the whole of the 7-year insurance period. The premiums do not reduce year on year, just the benefit amount.

After the 7-year period has passed, the Gift Inter Vivos insurance cover expires. This results in no benefit amount being paid and premiums are no longer required.

Inheritance Tax can be complicated, and Taper relief might not always apply. It’s important to speak to a Financial Adviser about your potential tax liabilities before putting any policies in place.

Example of Decreasing Inter Vivo cover amounts

If a gift was made for £400,000, this would use the full nil-band allowance and an amount of £75,000 would be liable for IHT.

£75,000 would be taxed at 40%.

£75,000*40% = £30,000.

To cover this liability, a policy would need to be put in place for a cover amount of £30,000. However, taper relief only starts to reduce the tax once you have survived three years from the date of the gift, after which the liability tapers away.

The Gift Inter Vivos policy takes taper relief into account, and the benefit amount reduces year on year to match.

Benefit amounts:

Less than 3 years: £30,000 (40% tax).

3 to 4 years: £24,000 (32% tax).

4 to 5 years: £18,000 (24% tax).

5 to 6 years: £12,000 (16% tax).

6 to 7 years: £6,000 (8% tax).

7 years onwards: £0. Policy expires.

When is Gift Inter Vivos used?

This policy is used for people with large estates that want to make a gift more than their Nil Rate band. It can reduce their potential Tax bill. Especially if they are worried that should they die within 7 years of providing the gift the beneficiary will incur a tax liability. It will ensure that whoever receives the gift is not penalised by Tax as normally the intention of a gift is that it is passed to someone without cost.

Gift Inter Vivos Policies written in Trust

A Trust is a legal agreement made to transfer the ownership of an asset from one person to another.

Putting any Life assurance policy into Trust transfers the ownership out of the Estate. That means no further tax liability will be added for the benefit of the insurance policy. Gift Inter Vivos life Assurance is no exception.

It is advisable to put this policy into trust for the most efficient tax savings.

A financial adviser will be able to help you review your needs and uses for Trusts.

How to arrange Gift Inter Vivos Insurance

Gift Inter Vivos can be a complex policy. There are many considerations that need to be taken into account.

It is a good idea to seek advice from a Later life Adviser or Financial Adviser to discuss your full needs. For example, ensuring your Will is correctly in place and in line with any Gift Inter Vivos policy you may need set up. You may also want to read our fuller guide to Gift Inter Vivos, and how giving your house to your children can create a gift for inheritance tax.