What life cover could be recommended to protect against any inheritance tax (IHT) due on a cash gift of £500,000 to an individual?

For protection policies only. This information is for financial advisers only. It mustn’t be distributed to, or relied on by, customers.

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IHT would be payable on the gift if the donor died within seven years of making it. The IHT nil rate band would be completely used up by this gift with IHT payable at 40% on the remaining £175,000. Taper relief would reduce the impact if death occurred after year three. You could recommend gift inter vivos with an initial benefit amount of £70,000 (40% of £175,000), which would reduce over a seven-year term.

It’s also worth considering that the payment of the gift would use up the IHT nil rate band for seven years after making it, meaning that it wouldn’t be available to offset against the IHT estate. So, a level protection policy with a term of seven years for £130,000 (40% of £325,000) could be recommended to protect the estate from this additional potential IHT.

This information is based on our understanding of current taxation law and HMRC practice, which may change.