Making a large lifetime gift is a powerful IHT planning strategy — but it carries a risk. If you die within seven years of making the gift, the recipient is usually liable to pay the inheritance tax on it. For large gifts, this can mean a significant and unexpected tax bill. Gift inter vivos insurance is specifically designed to eliminate this risk.
What Is Gift Inter Vivos Insurance?
Gift inter vivos insurance is a specialised decreasing-term life insurance policy taken out at the time a large gift is made. It is structured to cover the exact IHT liability that would arise if the donor dies within seven years. The sum assured mirrors the taper relief sliding scale — decreasing year by year as the potential tax liability reduces.
In year one, the policy covers the full potential IHT liability. By year six, the cover has reduced to reflect the 8% taper rate. After seven years, the policy expires — because the gift is fully exempt and no IHT liability remains.
Why Is It Needed?
When a donor dies within seven years of making a gift, it is the recipient — not the estate — who is primarily liable for the IHT on that transfer. Without insurance, the recipient may need to sell the gifted asset (or other property) to fund the tax bill. For property gifts in particular, this can be deeply disruptive. Gift inter vivos insurance ensures the recipient has the cash to pay the tax without selling anything.
How the Policy Mirrors Taper Relief
The policy is structured as a decreasing-term policy that tracks the taper relief schedule precisely. If the gift is £500,000 and the NRB is £325,000, the maximum potential tax is 40% of £175,000 = £70,000. In year one, the policy covers £70,000. By year four (32% rate), it covers £56,000. By year six (8% rate), it covers £14,000. This proportional reduction keeps premiums cost-effective throughout the seven-year period.
Who Should Consider It?
Gift inter vivos insurance is most relevant for anyone making a large gift — particularly property transfers — where the potential IHT liability on a failed PET would be significant. It is especially important where the recipient does not have liquid assets to fund a tax bill and where the gifted asset (such as a family home) cannot easily be sold in part.