Solutions For Protecting Your Wealth From Inheritance Tax – A Case Study

Toby Johncox, Head of Mortgage Sales at Enness Global, and Carlton Crabbe, CEO of Capital for Life, have explored how life insurance and premium financing can form part of a wider estate planning strategy for high-net-worth families.

One example considers a married couple with a young family who are French nationals and currently resident in the UK. The couple own a London property valued at £7m with no existing mortgage. Their objective is to protect family wealth and plan for potential inheritance tax liabilities while maintaining flexibility for future financial needs.

The simple solution

In this scenario, the estimated UK inheritance tax liability on the property is £2.4m. The family also needs to consider how this liability could increase over time should the value of the London property continue to rise.

A straightforward approach could involve remortgaging the property at a relatively low 15% loan-to-value, releasing £1.1m of equity. The released capital could then be used to purchase a life insurance policy designed to provide sufficient cover for the family's potential inheritance tax exposure.

Under the example structure, a £1.1m premium could provide a death benefit of £3.9m. This could cover the estimated £2.4m inheritance tax liability while also providing additional financial protection for the family.

If the property is jointly owned, it may pass to the surviving spouse without an immediate inheritance tax charge on the first death. However, the insurance proceeds could provide flexibility for future inheritance tax planning, family protection or additional estate planning arrangements.

A longer-term solution

Estate planning also needs to consider how asset values and potential tax liabilities may change over time.

In the example, the husband is aged 50 and initially insured for £3.9m. If the value of the London property increases over the following decades, the potential inheritance tax exposure could also rise.

A policy with increasing benefits could therefore provide greater protection over the long term. By the age of 90, the example policy could provide a death benefit of £7m, reflecting projected growth in the value of the underlying property and the potential increase in inheritance tax exposure.

Policies can be structured in different ways, including annual increases or index-linked benefits, depending on the objectives and circumstances of the family.

A broader wealth planning approach

A more comprehensive solution would take into account the family's wider financial position and longer-term objectives.

In this example, the husband earns £450,000 per year and holds a private banking portfolio valued at £4m. The family has significant ongoing expenditure, including school fees, while also planning for retirement.

The husband intends to retire at 60 and would like to generate an annual retirement income of £250,000. The existing private banking portfolio may be capable of supporting this objective, but the family is also considering alternative strategies to diversify its sources of wealth and income.

The family also has an estimated inheritance tax liability of £2.4m on the London property and a further £1.6m potential liability relating to the private banking portfolio.

Additional objectives include purchasing a property in Paris, potentially as a buy-to-let investment and a home base in France, while also exploring opportunities to support future generations through education funding and wider estate planning.

In this scenario, the use of mortgage finance could allow the family to access capital tied up in the London property while retaining ownership of the asset. The released funds could then be deployed across a broader wealth and estate planning strategy.

The example solution

Under the proposed structure, the family takes out a £4.8m mortgage against the £7m London property, representing a loan-to-value of approximately 70%.

The released capital is placed into an offshore life insurance policy with increasing death benefits. Under the example modelling, the policy provides a death benefit of £12.2m, offering significant protection against potential inheritance tax liabilities while also providing financial security for the family.

The structure also demonstrates how certain cash-value whole-of-life policies may potentially be used as part of a wider financial strategy rather than solely as protection against a tax liability.

Based on the example modelling, the policy could provide an annual income of £250,000 from the age of 60 while maintaining the £12.2m death benefit. This could help support retirement planning while preserving longer-term protection for beneficiaries.

For high-net-worth families with complex financial arrangements, estate planning can involve far more than simply protecting against an immediate inheritance tax bill. Mortgage finance, life insurance, investment portfolios, retirement planning and intergenerational wealth transfer can all form part of a broader strategy designed around the family's long-term objectives.