Potentially Exempt Transfer insurance / Gift inter vivos policies

Who actually pays the inheritance tax?

Many landlords assume inheritance tax is always paid by the estate. This is not always correct. Where a PET becomes chargeable due to death within seven years, the primary liability falls on the recipient of the gift. This creates a potentially serious liquidity problem.

Consider a simple example:

A landlord gifts a £500,000 rental property to their daughter.

Three years later, the landlord dies.

Inheritance tax at 40% may become payable, subject to available nil rate band relief.

The daughter may face a tax bill of up to £200,000.

She now owns the property. But she may not have £200,000 in cash.

Her options may be limited:

• Sell the property
• Borrow against the property
• Or use personal funds if available

None of these outcomes may reflect the original intention of the gift. The purpose of the gift may have been to preserve long-term family ownership, not to trigger forced disposal. This is the precise commercial problem that Potentially Exempt Transfer insurance solves.

How the insurance is structured in practice

Potentially Exempt Transfer insurance is normally arranged as a specialist decreasing term life insurance policy.

The policy runs for seven years.

The insured amount reduces over time in line with taper relief. This ensures the cover closely matches the actual tax exposure.

The policy is typically written in trust for the benefit of the gift recipient. This is critical.

Writing the policy in trust ensures the payout falls outside the donor’s estate and is immediately available to the beneficiary.

The funds can then be used to pay inheritance tax directly. This avoids delays, complications, or unintended tax consequences.

Real-world example relevant to landlords

Consider a landlord with a £2 million property portfolio.

Following the death of their spouse, they decide to gift £800,000 of property to their children. This may represent several rental properties or shares in a property company.

The potential inheritance tax exposure is £320,000.

The landlord takes out Potentially Exempt Transfer insurance for £320,000.

If they survive seven years, no tax arises and the insurance expires.

If they die within seven years, the insurance pays out.

The children retain the properties intact.

The succession plan succeeds.

Without insurance, the children might have been forced to sell property to pay tax.

The difference is profound.

How much cover is needed and what does potentially exempt transfer insurance cost?

The amount of insurance required depends on the potential inheritance tax exposure created by the gift, not the value of the gift itself.

Inheritance tax is normally charged at 40% on the taxable value of the gift, after deducting any available nil rate band. This distinction is important because many landlords overestimate or underestimate the true exposure.

The correct calculation follows three steps.

First, determine the value of the gift at the date it was made.

Second, deduct any available nil rate band. As of the current tax year, the nil rate band is £325,000 per individual. Where the nil rate band was unused on the first spouse’s death, it can usually be transferred, creating a combined nil rate band of up to £650,000.

Third, apply the 40% inheritance tax rate to the remaining taxable amount.

For example:

• Gift value: £800,000
• Available nil rate band: £325,000
• Taxable amount: £475,000
• Potential inheritance tax exposure: £190,000

In this scenario, the appropriate starting insurance cover would normally be £190,000.

Because taper relief reduces the liability over seven years, the insurance policy is structured to reduce gradually during that period.

This ensures premiums remain proportionate to the declining risk.

Typical premium costs and what affects them

Premiums for Potentially Exempt Transfer insurance are generally modest relative to the risk being insured.

The cost depends primarily on four factors:

• Age of the insured individual
• Health and medical history
• Amount of cover required
• Length of the remaining seven-year exposure period

As a broad illustration, a healthy landlord aged 65 insuring a £200,000 inheritance tax exposure might expect annual premiums in the region of:

• £1,000 to £2,500 per year

At younger ages, premiums can be significantly lower.

At older ages or where health conditions exist, premiums increase accordingly.

However, even where premiums are higher, the commercial logic often remains compelling.

Paying a relatively modest annual premium to protect hundreds of thousands of pounds of family wealth represents a rational risk management decision.

Why the policy is normally written in trust

Writing the policy in trust is not optional. It is essential to achieving the intended outcome.

If the policy were owned personally and paid into the estate, it could itself increase the inheritance tax liability.

Writing the policy in trust ensures:

• The payout falls outside the estate
• The funds are paid directly to the intended beneficiaries
• The money is available immediately
• Probate delays do not interfere with payment

This ensures inheritance tax can be settled promptly without forcing asset sales.

Most insurers provide standard trust documentation for this purpose.

Medical underwriting and practical considerations

Unlike whole-of-life inheritance tax insurance, Potentially Exempt Transfer insurance is temporary. The maximum term is normally seven years. This limited duration reduces underwriting risk for insurers and helps keep premiums reasonable.

Medical underwriting is still required.

This typically involves:

• A health questionnaire
• GP report if necessary
• Occasionally a medical examination

Approval is usually straightforward for individuals in reasonable health.

Even where health conditions exist, cover is often still available, though premiums may increase.

Insurance providers

Royal London Insurance

LV

Legal & General

Aviva has a particularly helpful spreadsheet available for download here

Why regulated whole-of-market IFA advice is essential when arranging PET insurance

Potentially Exempt Transfer insurance is straightforward in principle, but the consequences of getting it wrong can be severe.

The amount insured must be correct. The policy must be structured correctly. The trust must be drafted correctly. The taper relief profile must be reflected accurately.

These are not administrative details. They determine whether the insurance actually delivers the protection intended.

This is why regulated, whole-of-market Independent Financial Adviser advice is essential.

A regulated IFA has a legal duty to act in your best interests. This duty is enforced by the Financial Conduct Authority. Advisers must assess your circumstances properly, recommend suitable products, and accept regulatory accountability for that advice.

This provides protection that cannot be replicated through direct-to-consumer purchases or restricted advisers.

Whole-of-market access is equally important.

Different insurers have different underwriting criteria, pricing models, and trust options. Premium differences between insurers can be substantial, particularly for older clients or those with medical conditions.

A whole-of-market IFA can approach multiple insurers and identify the most appropriate and cost-effective solution.

Just as importantly, they ensure the insurance aligns with your wider estate planning strategy.

Inheritance tax exposure does not exist in isolation. It interacts with:

• Your available nil rate bands
• Transferable nil rate band from a deceased spouse
• Residence nil rate band eligibility
• Existing lifetime gifts
• Trust arrangements already in place
• Corporate ownership structures

An experienced IFA will assess the entire position, not just the individual gift.

This prevents both over-insurance and under-insurance.

Over-insurance wastes money on unnecessary premiums. Under-insurance exposes your family to avoidable tax liabilities.

Both outcomes are undesirable.

Trust structuring is another critical area.

The policy must normally be written into an appropriate trust to ensure proceeds fall outside your estate and are available immediately to beneficiaries.

Incorrect trust structuring can undermine the effectiveness of the insurance.

A regulated adviser ensures this is done properly.

This professional oversight provides something more valuable than the policy itself. It provides confidence that your succession planning will work as intended.

For landlords who have spent decades building property portfolios, that certainty matters.

Insurance is the tool. Regulated advice ensures the tool is used correctly.

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Frequently asked questions

Can Potentially Exempt Transfer insurance be arranged on a ‘life of another’ basis?

Yes. This is both possible and common.

The recipient of the gift, for example your children, can take out the insurance policy on your life. This is known as a “life of another” policy.

In this arrangement:

• The children own the policy
• The children pay the premiums
• The policy pays out to the children if the donor dies within seven years

This structure ensures the funds are available precisely where the inheritance tax liability arises.

It also ensures the policy proceeds do not form part of the donor’s estate.

This approach is often commercially sensible where the gift recipient wishes to protect the asset they have received, particularly where the asset is valuable or strategically important.

Is there an insurable interest when children insure a parent’s life?

Yes. UK insurance law recognises that recipients of a Potentially Exempt Transfer have a clear financial interest in the donor’s survival for at least seven years.

If the donor dies within that period, the recipient may become liable for inheritance tax.

This potential financial exposure creates a valid insurable interest.

Insurers routinely accept this basis for Gift Inter Vivos policies.

Who normally pays the premiums?

This can be structured in several ways.

• The donor can pay the premiums
• The recipient can pay the premiums
• Premiums can be funded indirectly from gifted income or assets

Where the recipient pays the premiums directly, this ensures the protection is independent and avoids increasing the donor’s estate.

Are the insurance premiums themselves treated as gifts for inheritance tax purposes?

Yes, where the donor pays the premiums, they are normally treated as gifts for inheritance tax purposes.

However, in many cases they fall within one of the statutory exemptions.

These may include:

• The £3,000 annual gift exemption
• Regular gifts out of surplus income exemption

Where premiums qualify for these exemptions, they do not create additional inheritance tax exposure.

A regulated Independent Financial Adviser can help ensure premiums are structured efficiently within the available exemptions.

What happens if the donor becomes uninsurable after making a gift?

This is an important practical risk.

If insurance is not arranged at the time the gift is made, and the donor later develops health problems, insurance may become unavailable or prohibitively expensive.

This would leave the recipient exposed to inheritance tax risk for the remainder of the seven-year period.

For this reason, insurance should normally be considered at the same time the gift is made, while the donor remains insurable.

Does the policy need to be written in trust if arranged on a life of another basis?

Not necessarily.

If the recipient owns the policy directly, the proceeds are paid to them automatically and do not form part of the donor’s estate.

However, professional advice is still essential to ensure the ownership structure aligns with the wider estate plan.

What happens if the donor survives seven years?

The Potentially Exempt Transfer becomes fully exempt from inheritance tax.

The insurance is no longer needed and the policy expires.

This means the succession plan has completed successfully and the insurance has served its purpose by protecting the transition period.

Can the insurance cover multiple gifts made at different times?

Yes. Insurance can be structured to reflect multiple gifts.

This may involve:

• A single policy covering multiple transfers, or
• Separate policies aligned to the timing of each gift

This ensures each seven-year exposure period is properly protected.

Is Potentially Exempt Transfer insurance widely available in the UK?

Yes. Several major UK insurers offer Gift Inter Vivos policies.

These include Royal London, LV, Legal & General, and Aviva.

Policies are typically arranged through regulated Independent Financial Advisers with access to the whole market.

Is this type of insurance only relevant for very large estates?

No. It can be relevant wherever a significant lifetime gift has been made.

Even relatively modest property transfers can create inheritance tax exposures large enough to justify insurance.

The commercial decision depends on the potential tax liability, the donor’s age and health, and the importance of protecting the gifted asset.