Far too often, small business owners, especially in the early years, find themselves working in the business rather than on the business. This can leave them consumed with the day to day rather than attending to their long-term financial security. Gaps can appear, such as a shortfall in business protection.
We put together two fictional entrepreneurs – Anita and Brad – who set up Funny Bones Physiotherapy Ltd.
They’ve successfully grown their business and have made the decision to sell the company before retiring. Throughout their working careers, they have implemented protection policies such as personal life insurance, relevant life cover, shareholder protection, income protection, family income benefit, and critical illness cover and, in doing so, they have protected themselves, their families and the business.
As they sell the business and embark on the next chapter of their lives, they will need to adjust their protection strategy. Relevant life cover has played its role but will cease when Anita and Brad sell the business. They will therefore need to adopt an alternative protection strategy.
A whole-of-life (WOL) policy as an inheritance tax (IHT) strategy
WOL is a type of life insurance policy that ensures that, no matter when you die, your beneficiaries will receive a lump sum payout from the provider. As long as the premiums are paid and policy terms are met, the cover will last until death occurs.
For instance, Anita is married. On first death, the spousal transfer of assets will be exempt from IHT, so she is considering implementing a joint-life second-death policy for her and her spouse, ensuring that on the second death, the policy will pay out.
The level of cover would be written in trust for the benefit of their children and grandchildren, who will eventually inherit their joint estate, therefore circumventing probate and IHT consideration on the sum assured. Consequently, the funds paid out to the beneficiaries will usually not only be free from IHT but could provide much needed short-term liquidity for the beneficiaries.
Anita likes to understand her outgoings, so it will be best for her to choose a guaranteed premium product to know how much it’s going to cost each month no matter how long her and her spouse live for. They may also want to have the cover increase with inflation to take into account any impact of the rising value of their estate. This may also prevent having to apply for more cover each year.
Taking the above into account, let us put this into practice and see how WOL cover could protect Anita’s IHT liability.
Accumulation of wealth
Anita and her spouse (Dylan) are age 60, with two adult children and three grandchildren. Following the sale of the business for £2 million net, they have paid off all mortgages and debts, and their estate can be summarised as follows:
| Main residence | £1,200,000 |
| Buy-to-let properties | £800,000 |
| Cash | £300,000 |
| ISA portfolio Anita | £200,000 |
| ISA portfolio Brad | £200,000 |
| Total | £2,700,000 |
Currently, in the UK there’s a tax threshold for IHT, known as the nil-rate band (NRB), and if your assets are below this limit you pay zero tax. For the 2025/26 tax year, the basic threshold is £325,000. The rate is then usually 40% on anything above this amount. In addition to the NRB, individuals may have a residence nil-rate band (RNRB) of £175,000. This is available when residential property is left to direct descendants. Just like the standard NRB, any unused RNRB on the first death of a married couple has the potential to be transferable to the surviving spouse.
Anita and Dylan will have their NRBs (£325,000 x 2 = £650,000), which will not be subject to IHT. However, due to the size of their estate when the second of them dies, they may not benefit from the RNRB of £175,000 each, because it is reduced by £1 for every £2 of value by which an estate exceeds the taper threshold (currently £2 million). In this case, on second death, the tapering reduces their RNRB to zero. Their IHT calculation is therefore as follows:
| £2,700,00 (estate) – £650,000 (NRB) = £2,050,000 |
| £2,050,000 x 40% (IHT) = £820,000 |
This means that Anita and Dylan’s children will have to pay £820,000 Inheritance Tax, which usually needs to be paid within six months (prior to interest charges being applied) before they can inherit their parents’ estate.
The drawbacks
Before we look into the benefits of a WOL policy for IHT purposes, let’s discuss the negative perceptions associated with this strategy. Firstly, WOL monthly premiums can cost substantially more than term assurance policies and this can be a deterrent. WOL cover becomes more expensive to establish the older an individual gets. With this in mind, it may not be a viable option for those over age 80, as affordable terms may not be available.
The premiums may count as potentially exempt transfers (PETs) or chargeable lifetime transfers (CLTs), which could use up some of the NRB, but structuring this to be paid out of surplus income can mean the gifts are immediately exempt.
The numbers
If Anita and Dylan took out a WOL policy for £820,000 to cover the IHT liability, it would cost Anita and Dylan £1,161 per month. The table below summarises the amount of premiums paid from age 60 on standard terms and how that looks compared to the original IHT liability.
| Age second death occurred | Premiums paid since establishment at 60 years old | Difference between IHT liability and premiums paid |
| 70 years old | £139,320 | £680,680 |
| 80 years old | £278,640 | £541,360 |
| 90 years old | £417,960 | £402,040 |
| 100 years old | £557,280 | £262,720 |
Guaranteed basis, second death, level cover for two healthy 60-year-olds. Please note that the above figures are for illustrative purposes only.
As the numbers illustrate, if they established a WOL policy, then Anita and Dylan’s premiums would be significantly less than the IHT bill, even if they lived to 100! Alternatively, if Anita and Dylan choose to do nothing, then as matters stand, their beneficiaries will have to pay an approximated £820,000 IHT liability in order to release their estate (although there may be instalment options for illiquid assets such as property).
A WOL wealth succession strategy is a selfless plan, meaning Anita and Dylan will be paying premiums during their lifetime to ensure their children (and grandchildren) are not left with a substantial burden upon their death. An alternative view is to consider the premiums as an investment for the family that their children (and grandchildren) would benefit from.
For some, this is not seen as a big enough motivator to establish such a strategy, whereas for others it is imperative that they are able to pass on as much of their estate as possible to their loved .
Content correct at time of writing and relates to the 2024/25 tax year.
This article was written by Wealth Management Consultant, Anthony Rowe.
This article has been produced for information purposes only. It is not intended to be an invitation to buy or act upon the comments made. All investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances and one must satisfy certain investor criteria before being considered eligible to invest. Any forward-looking statements and forecasted returns represent the current views of Mattioli Woods Limited and may be subject to change. Your capital may be at risk and past performance is not a guide to future returns. Mattioli Woods Limited is authorised and regulated by the Financial Conduct Authority.
