Avoiding Inheritance Tax on Life Insurance: A Guide for Families
Thousands of families in the UK are unknowingly overpaying inheritance tax on life insurance policies due to a common oversight. Recent figures from HMRC indicate that around 7,500 families incurred inheritance tax liabilities related to life insurance policies between 2022 and 2023. However, many of these families could have avoided this tax burden if they had taken the simple step of placing their policies in trust.
Understanding Life Insurance Trusts
When a life insurance policy is written in trust, the payout goes directly to the beneficiaries, bypassing the deceased’s legal estate. This means that the amount paid out generally won’t contribute to the inheritance tax calculation, allowing families to keep more of the money intended for them.
The Cost of Ignoring Trusts
In the tax year 2022/23, nearly a quarter of the 31,500 estates subject to inheritance tax—specifically 7,458 estates—had life insurance policies. Collectively, these policies were valued at £865 million, potentially leading to an astounding £346 million in inheritance tax if faced with the full 40% tax rate. By putting policies into trust, families could avoid this tax while ensuring faster payouts, which can make a significant difference for dependents relying on these funds for immediate expenses.
The Importance of Professional Advice
Sean McCann, a chartered financial planner from NFU Mutual, underscores the importance of professional advice regarding life insurance. Many individuals purchase life insurance without guidance, leaving them unaware of the potential tax implications associated with not putting the policy in trust.
Should You Put Your Life Insurance in Trust?
As inheritance tax laws evolve, particularly with significant changes slated for 2026 and 2027, it becomes increasingly important to consider putting life insurance policies into trust. The process is typically straightforward. If you haven’t already placed your life insurance policy in trust, you can contact your provider and request a trust form.
- Health Considerations: It’s worth noting that if you are in good health when you create the trust, there generally won’t be any inheritance tax repercussions. However, if you have a serious illness at the time and pass away within seven years, HMRC could assess the policy’s value and include it in your estate for tax purposes.
Rising Inheritance Tax Concerns
The growing property values have resulted in more families facing inheritance tax bills when a loved one passes away. HMRC’s latest data shows that approximately 3,700 additional deaths incurred inheritance tax liabilities in 2022-2023, marking a 13% increase from the previous year.
Key Statistics:
- Total IHT-Paying Estates: 31,500
- Proportion of Estates Liable: 4.62% (up by 0.23 percentage points)
- Nil-Rate Threshold: Inheritance tax is charged on estates exceeding the £325,000 threshold, along with an additional £175,000 for main residences.
Couples can, therefore, transfer up to £1 million without incurring inheritance tax, thanks to combined allowances. However, these tax-free thresholds have been frozen until 2030, resulting in broader implications for families as asset values rise.
Conclusion: Secure Your Family’s Future
As inheritance tax regulations tighten and property values soar, it’s essential for families to explore ways to minimize their tax liabilities. By acting now and putting life insurance policies into trust, families can avoid unnecessary inheritance tax bills and ensure that the intended financial support reaches their beneficiaries swiftly.
For families navigating the complexities of inheritance tax and life insurance, professional advice can make a world of difference. Don’t wait until it’s too late—take action today and secure your loved ones’ financial future.
