Giving Between Generations – Gift Inter Vivos Insurance Can Protect Your Beneficiaries against an Unexpected Inheritance Tax Bill

One very straightforward way to pass property or assets to your children and reduce their inheritance tax burden is to gift money or property before you die – known as a Lifetime Gift or Gift Inter Vivos.

The Seven-Year Inheritance Tax Rule for Lifetime Gifts

We often think about Lifetime Gifts when we retire or downsize. It is a time when parents can free up assets as their own children may need more financial help to support their own young family.

The great benefit of gifting during your lifetime is that you can give away any amount you want and, providing you do not die within a seven-year period, there is no inheritance tax to pay on this gift (PET – a potentially exempt transfer).

While there is no limit on the amount you can give away, if you do die within the seven-year period, this gift will be included as part of your estate and is subject to inheritance tax.

So how can you confidently pass on a gift without your beneficiaries worrying about paying a large Inheritance Tax bill?

Inheritance tax liability for lifetime gifts decreases over a seven-year period and Gift Inter Vivos Insurance is perfectly designed to work in tandem with the decrease in tax liabilities over this period.

If you die within the first three years of a lifetime gift, inheritance tax is calculated on the entire value of the gift, which means beneficiaries would have to pay up to 40% inheritance tax on the original gift.

If you die in years 4 to 7, inheritance tax will be calculated at a progressively smaller proportion of the gift each year – IHT liabilities tapering down over this period. For example, if you were to die in year 7, inheritance tax would be calculated on just 20% of the original gift, leading to a considerable reduction in tax liability.

After year 7, beneficiaries are no longer liable for any inheritance tax, so many families view this method of protecting assets as an acceptable risk, but Gift Inter Vivos insurance provides affordable protection throughout the period when beneficiaries are liable for tax, providing peace of mind.

How does Gift Inter Vivos Insurance Help Protect Your Beneficiaries?

A Gift Inter Vivos Case Example:

A 70- year- old widow chooses to gift £250,000 to her daughter during her lifetime. She dies suddenly just two years after the gift.

The daughter inherits her parents’ house valued at £950,000, with a further £50,000 in cash. She benefits from both her mother’s and father’s individual tax-free nil rate allowance of £325,000. A further property nil rate allowance of £175,000 is applied for each parent because the main house has been passed to their direct descendant. Her total tax-free allowance for inheritance is £1 million.

The £250,000 she was gifted two years earlier exceeds this allowance, so she is now liable for inheritance tax (@40%) on the entire gift, resulting in an Inheritance Tax Bill of £100,000.

If the widow had died five years later (year 7), only 20% of the original gift would have been considered as liable for tax. The gift would still have exceeded the threshold of £1 million, but inheritance tax would only be due on £50,000 (20%) of the original £250,000 – the inheritance tax bill would be at a much lower level of £20,000.

If the mother had taken out Gift Inter Vivos Insurance as soon as she had gifted the £250,000 to her daughter and then passed away within the 7- years, the policy payout in any year would have matched the daughter’s Inheritance Tax Liability, protecting her daughter against the worry of suddenly having to find a large sum for HMRC.

Gift Inter Vivos for a 70-year old person taking out a £100,000 policy to cover Inheritance Tax (IHT) on a £250,000 Gift:

Premium is only paid up to the year of death, so the total premium paid varies (Rates March 2025)

Gift Inter Vivos Insurance Variations

Annual premiums for Gift Inter Vivos policies vary depending on the level of cover needed to match the Inheritance Tax Liability and the age you are when you take out a policy. The older you are, the more likely you are to die within the next 7 years, presenting a greater risk for insurers. Insurers specialising in Gift Inter Vivos Insurance are usually happy to offer these 7-year policies up to the age of 79 years, but they become progressively more expensive as you become older.

Gift Inter Vivos Premiums for an 79 year old person taking out a £100,000 policy to cover IHT on a £250,000 gift:

Premiums for a larger Lifetime Gift for a 60-year-old taking out a £500,000 policy to cover IHT on a £1,250,000 gift:

Bespoke Gift Inter Vivos Policies to Protect Your Beneficiaries

If you intend to make a large gift during your lifetime and want to protect your beneficiaries from the worry of paying an unexpected inheritance tax bill, Ali Adham Castleacre’s Life Insurance specialist, offers advice on a wide range of options including Gift Inter Vivos insurance tailored to your precise needs.

You can visit our Life Insurance Page to learn more about how life insurance can protect against Inheritance Tax Changes.