Easing the Burden of Death Duties.
WHETHER a man inherits his wealth or whether it is the product of his own abilities and exertions, the desire to pass it on in undiminished magnitude to his descendants is natural. The death duties are a serious obstacle to giving effect to this aspiration to honour the debt to those who have gone by repaying it to those who come after, or to assure the welfare of one's posterity. Without reckoning the heavy legacy and succession duties, the Estate Duty alone amounts to £20,000 on a deceased estate of £100,000, to £65,000 on an estate of £250,000, to £400,000 on an estate valued at £1,000,000, and to one-half of the whole of estates of £2,000,000 or more. After passing through two or three deaths the original estate is cut down to insignificant proportions, unless adequate arrangements be made beforehand against the contingency. The best way to prevent the extinction of the family fortune is by a policy of life assurance, because this is, in a sense, subsidized by the Government, easing in a measure the burden of the duties. It is at present the sole medium available for the purpose which is specially privileged. When Victory Bonds stood at a discount their acceptance by the Revenue Authorities at par in payment of the duties constituted a valuable concession. Now that the bonds stand at nearly 118, their use to defray the duties involves loss. Those who acquired them at a lower price with this object in view can realize a handsome profit, which can be further increased by the adoption of the course outlined in this article. Life assurance spreads the burden methodically and evenly over the period of the beneficiary's enjoyment of the estate. The premium subtracts something from the income derived therefrom, but the subtraction is less than would be the case if the corpus of the estate had been curtailed by the amount of the duties on entering into possession, or which will be suffered by his successor in title if the burden of the duties is left for him to shoulder.
For illustration, take an estate of £100,000 belonging to a man aged 35 next birthday. The Estate Duty will be £20,000. The annual premium for a life policy for this sum will be about £400. Income-tax rebate will be allowed on the premium at the rate (at present) of 2s. 8d. in the £. The total rebate will be £45, so that the amount actually paid would be £355. Assuming. an average rate of interest of 4 per cent., the gross income from an estate of £100,000 would be £4,000 per annum. Deducting the £355 leaves a balance of £3,645. If the £100,000 be reduced to £80,000 by the payment of the duties, the interest income would be £8,200, in contrast with the £3,645 where the duties are provided by "life assurance. If the age of the owner of the estate be 50 next birthday the annual premium for the policy would be £700. Deducting the income-tax rebate leaves £621 5s. actually paid, reducing the income of £4,000 to £8,879, or still more than the income obtained where the duties are met out of the capital of the estate. A life policy provides the means for paying the duties in a form acceptable to the Inland Revenue. To appre- • ciate fully the advantages of this calls for a little thought. Death duties have to be paid in cash ; portions of the estate; in whatever form it may exist, will not be accepted in settlement. Securities must be realized by the executors and the proceeds handed to the authorities, Life assurance saves the expenses of realization, and, still more important, it may obviate heavy losses. For purposes of duty an estate is valued as at the date of death. By the time it comes to be liquidated in order to secure the funds to discharge the claims of the revenue values may have fallen. Depreciation subsequent to death makes no difference to the arnoi a!, of the duti( s payable. The best value cannot be expected to be obtained at a forced sale, such as the liquidation of a deceased estate involves. If the estate includes a large holding of any particular kind of security or property, the mere fact that it is to be sold exerts a depressing influence on the market. If the depreciation be serious the loss on top of the duties may be disastrous.
As a precaution against possibilities of this kind owners of large estates usually keep a fair proportion of their resources in easily realizable securities. But even the very best of these are subject to fluctuations in value. Last year was a stable period from the Stock Exchange point of view, that is to say, it was free from financial or other crises or disasters likely to cause violent market movements, and yet the differences between the highest and lowest points touched by British Government securities were marked, as witness the following examples :
Highest. Lowest.
War Loan 3} per cent. .. 102* 97/ Consolidated 4 per cent. .. 110* 105* Conversion 41 per cent. 11111 1071
If it chanced that any of these securities had had to be valued at the highest point and sold at the lowest the loss would have been substantial. Much wider fluctuations occur in the prices of speculative issues. The degree of realizability affects the interest yield of a security. The more readily realizable a stock or share the less the rate of interest returned. To hold masses of gilt-edged securities as a provision against the payment of death duties entails a smaller income. By taking care of the death duties, life assurance enlarges the freedom of action in the employment of money, permitting of the choice of investments producing the greatest returns, and making the question of the rapidity with which they can be turned into cash a minor consideration.
An objection sometimes urged against resort to life assurance for .the purpose of providing for death duties is that it may increase the rate of duty because the proceeds of the policy are included in the valuation of the estate. Such objection applies to every method. Obviously, if the estate is to be passed on intact a sufficient additional sum equal to the amount of the duties must be accumulated. In _ point of fact, life assurarcz offers the only way in which this disadvantage can be avoided. The premiums need not be paid out of income ; they can be paid out of capital without prejudicing the income-tax rebate. Each year securities would be realized to produce the £355 required for the premium in the illustration first quoted above. This plan, of course, involves a small progressive reduction in annual income by the depletion of capital (exclusive of the amount of the policy), but at the beginning of the assurance the full £4,000 of income would be available and for the greater part of its duration the free income would be larger than if it were drawn upon to defray the premium. The expectation of life of a man aged 35 next birthday is about 35 years. At the end of the 35 years the total capital applied to payment of premiums would be £12,425, which at 4 per cent. would represent a reduction in income of £496. Setting off the gain in income by transferring the payment of premiums from income to capital the deficit at that stage would be £141 per, annum. A life policy is equal to the finest security and as capital is being replaced as fast as, indeed, in certain circumstances, faster than its withdrawal for premiums, the highest class of securities could first be sold. These would be those giving the smallest yield, and assuming this to be 31 per cent., the shortfall in income, as between the two methods of dealing with assurance, would then be only £79. There are various ways of obviating even this small shortfall in practice. As the policy creates an estate of £20,000 in itself, capital could be used for income up to that sum without impairing the corpus of the estate. An alternative would be to select a policy where the premiums cease after a certain number of years. A with-profits policy might perhaps offer the best solution, because the bonuses could be taken in cash and used as supplementary income. The cash value of bonuses where the life assured had attained the age of GO would be high. With the actual circum- stances in front of one the devising of a satisfactory
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