What is a Back to Back Plan?
A Back-to-back Plan is an estate planning tool ideal for people who continue to need income from their capital, but want to reduce their IHT liability. Capital is used to purchase an income producing annuity, with part of the income used to fund a whole of life policy (WOL) written in trust for the benefit of their beneficiaries. The premiums are exempt as part of the annual exemptions, the remaining income from the annuity is available to spend by the annuitant.
The annuity purchased would be a Purchased Life annuity (PLA) which offers significant tax advantages as opposed to a lifetime annuity. When the annuitant dies the annuity is worth nothing for IHT purposes, thus reducing the estate liable to IHT. The PLA can be on a single or joint life second death basis.
Problems may arise the older the person as the whole of life policy costs may be high. Certain rules apply that when the policies (the WOL and PLA) are not associated, this would require the WOL policy being underwritten without reference to the annuity. To remedy this, the PLA and WOL policies should be purchased from different life offices. A similar type of plan involves an annuity alongside a Term assurance.