The term “inter vivos” can be roughly translated as “between the living”. One way to reduce your potential Inheritance Tax (IHT) liability is to make gifts during your lifetime to another person, hence a transfer between the living.
Everyone has a personal inheritance tax allowance, which is currently £325,000 or possibly higher depending on your circumstances. Any amounts above this are subject to inheritance tax at the rate of 40%. One way to reduce this potential liability is to make a gift during your lifetime. The main issue with this is that the gift will only be exempt from inheritance tax if you survive at least seven years after granting the gift. For this reason, such gifts are known as potentially exempt transfers. The liability to inheritance tax gradually reduces over the seven years as follows:
| Policy year | Percentage of IHT payable | Effective rate of IHT |
| One to three | 100% | 40% |
| Four | 80% | 32% |
| Five | 60% | 24% |
| Six | 40% | 16% |
| Seven | 20% | 8% |
| Eight and onwards | 0% | 0% |
One solution to this issue is to purchase an insurance policy that will meet the liability for IHT. This would be due from the beneficiary for the IHT that would become due. A gift inter vivos policy is designed to meet the gradually reducing liability and pay out the appropriate sum on death within the first seven years. However, the main issue is that only a few insurers offer these policies.
Fortunately, there is another solution, which is offered more widely by insurers. With a multi-policy solution, the same result can be achieved using a suite of five term insurance policies each for a fifth of the total liability. The five policies run alongside each other with terms of three, four, five, six and seven years respectively. After three years, the first policy falls away, thus reducing the total cover by 20%.
The only real difference is that for a gift inter vivos policy, the premiums remain the same throughout the term, but for the suite of policies, they start a little higher and reduce overtime as each policy comes to an end.
In the unfortunate event of death within the seven years, the policies then, in force, will pay out and the premiums will cease.
Generally, it would not be sensible for the proceeds of the policy to be paid to the estate of the donor, as this is likely to increase the IHT due on their estate. To avoid this, the policy or policies should be written in trust. Not only then will the proceeds not end up in the donor’s estate, they can also be paid out without the delay of probate, so that the proceeds are available to the beneficiaries quickly to meet the IHT tax liability that will be due.
When determining the tax liability, you must consider how this interacts with the nil rate band for IHT, particularly with multiple gifts. It should also be noted that the liability on the remainder of the estate may be higher until the seven years have passed and the full nil rate band becomes available again. There are several things to consider and calculations to undertake, but if these are done properly, this can be an effective way to help the donor reduce their IHT liability. At the same time, ensuring that the beneficiaries of the gift are not landed with a tax bill to pay if death does occur in the first seven years.
Robert J Young Bsc FIA