How does a Gift Inter Vivos insurance policy work?

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If you’ve enquired about gifting part of your estate, chances are you’ve come across the term’ gift inter vivos’.

So, what does it mean, and how can you benefit from such a policy? Here, we take an in-depth look at gift inter vivos and guide you through everything you need to know.

What is a gift inter vivos policy?

Gift inter vivos is a Latin term that loosely translates to ‘a gift between the living’. To avoid paying tax on inheritance, you might choose to give part of your estate whilst still alive. In the UK, your gift is exempt from inheritance tax, provided that you stay alive for seven years. To avoid the worst-case scenario, a gift inter Vivo policy would protect the receiver from the inheritance tax liability should you die in that period.

How does gift inter vivos work?

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There’s currently an inheritance tax threshold of £325,000 in the UK. Anything lower than this value isn’t liable for inheritance tax, whilst a value that surpasses the threshold is. There are cases where the allowance is higher, but that depends on specific circumstances. The inheritance tax on anything that exceeds the threshold is currently set at 40% in the UK.

If you decide to give part of your estate to avoid this inheritance tax, there is a seven-year period where the gift is still liable for tax should you pass away. This is where a gift inter vivos policy is set up over a seven-year term to cover that liability.

The amount to be paid by the gift inter vivos policy is in line with the sum liable to inheritance tax.

The amount to be paid by the gift inter vivos policy is in line with the sum liable to inheritance tax. This value drops and matches the inheritance tax taper relief over the seven years.

Inheritance tax taper relief

The receiver could claim tax taper relief if you were to pass away between 3 to 7 years after gifting part of your estate. This means that tax on any amount exceeding the threshold drops to 32% in the fourth year, 24% in the fifth year, 16% in the sixth year and 8% in the final year.

Regardless of the taper relief, the gift inter vivos policy premium remains the same throughout the seven years.

What are the benefits of a gift inter vivos policy?

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Whether you are giving part of your estate to your children or other loved ones, it’s a good idea to ensure that they are protected should you die within the seven years. If you fail to implement some protection, the receiver might be liable to pay a large sum of inheritance tax, thus losing out on a large part of your estate.

This type of policy is essential if the gift amount is substantial or if the donor is in poor health, in a hazardous occupation, or at an advanced age.

The inheritance tax can also be hard to pay if the gift isn’t cash but something tangible instead, such as property or expensive jewellery.

When should I consider taking out a gift inter vivos policy?

It would be best if you considered a gift inter vivos policy the moment you plan to gift part of your estate. Get in touch with an insurance provider to talk through the policy, costs and what it covers.

How much does a gift inter vivos policy cost?

It’s challenging to create an average cost for gift inter vivos cover, since it depends heavily on the amount to be assured and the donor’s age, health, and medical history.

As an example, to assure a total sum of £900,000, you could be paying about £80 per month for the first three years, dropping to £65 per month the following year, £50 per month in the fifth year, £34 per month in the sixth year and £17 per month in the final year. This would result in a total cost of just under £5,000 over the seven years.

Note that for smaller amounts, coverage can be had for as little as £7 per month.

What to look out for when buying a gift inter vivos policy

Here are a few tips to follow when looking to take out a policy:

  • Try to get quotes from multiple insurance providers to compare. Gift inter vivos is a popular policy in the UK, and as a result, many providers are offering this service. Avoid accepting the first quote and shop around to compare deals. Many providers can also be flexible with prices.
  • Ensure that you’ve carefully considered all your options. Many details in inheritance tax law should be checked before a decision is made. Doing this could help you realise you don’t need a gift inter vivos policy in the first place.

Should I take out a gift inter vivos policy?

It’s essential to have adequate insurance to protect your loved ones should something happen. It would be a tremendous hassle if your gift recipient had to deal with inheritance tax, especially if you give them a property or other tangible gift.

Not only would they have to go through the process of selling the property, but they would also lose part of the value. This issue can easily be avoided by implementing a gift inter vivos policy. Get in touch with an insurance provider to discuss your options and whether a gift inter vivos policy is right for you.

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