Covering the gradually declining tax liability that may fall on the gift recipient
If the PET or CLT is within the NRB, taper relief will not apply. However, this does not mean that no cover is required. Death within seven years will result in the full value of the transfer being included in the estate. A seven-year level term policy may be the most appropriate type of policy in this situation.
Any additional Inheritance Tax is payable by the estate, so a trust for the benefit of the beneficiaries of the estate will normally be required.
Where the PET or CLT will exceed the NRB, the tapered Inheritance Tax liability that will result from death after the PET or CLT was made can be estimated, and a special form of ‘gift inter vivos’ (a life assurance policy that provides a lump sum to cover the potential Inheritance Tax liability that could arise if the donor of a gift dies within seven years of making the gift ) is put in place (written in an appropriate trust) to cover the gradually declining tax liability that may fall on the recipient of the gift.
A Level Term Assurance policy written in an appropriate trust
Trustees might want to use a life of another policy to cover a potential Inheritance Tax liability. Taper relief only applies to the tax.
The full value of the gift is included within the estate, which in this situation will use up the NRB that becomes available to the rest of the estate after seven years.
Therefore, the estate itself will also be liable to additional Inheritance Tax on death within seven years, and depending on the circumstances, a separate level term policy written in an appropriate trust for the estate beneficiaries might also be required.
Where an Inheritance Tax liability will continue after any PETs or CLTs have dropped out of account, Whole of Life cover written in an appropriate trust can also be considered.