According to the latest statistics from HMRC, more than a quarter of the estates that were subject to a 40% inheritance tax (IHT) charge in 2018–2019 included life insurance policies. The value of the policies totalled £709 million.
But consumers may be needlessly falling foul of the taxman, given that life insurance policies are exempt from IHT if they are written into trust.
The current threshold (nil-rate band/NRB) over which IHT on an estate is payable stands at £325,000. Under the current ‘spousal exemption’ rules, IHT is not payable if you leave everything to a spouse/civil partner. Married couples/civil partners can also inherit each other’s IHT exempt bands – the NRB, and the residence NRB/main residence allowance of £175,000. This means a married couple could have an IHT exempt threshold of up to £1,000,000.
Many couples who hold life insurance policies will designate their spouse as the payout recipient. For some this will be a logical step, providing money to pay bills or mortgage debts. If a policy is paid out to the surviving spouse it will be free from IHT initially, courtesy of the spousal exemption rule. However, its value will be included in the surviving spouse’s estate and, depending on the size of the insurance payout, this may trigger an IHT charge on the death of the surviving spouse (if the total estate exceeds combined NRB/RNRB allowances).
Writing the policy into trust, and designating children as beneficiaries, means that the payout will not be classed as part of the taxable estate on the death of the surviving spouse, avoiding a hefty IHT bill – see table below.
Writing a policy into trust is a simple process, and the majority of insurance providers offer this option when taking out a policy. A policy can also be put into trust at a later date, often with the help of a financial adviser. It can’t be put into trust after the death of the policyholder.
Putting the policy into a trust also affords the policyholder greater control, ensuring the payout can be used for its intended purposes, as well as avoiding the often lengthy probate process, thereby speeding up the distribution of lump sum payouts.
A financial adviser can help you find the right life insurance cover to match your specific needs, and explain how to write a policy into trust.
Speak to a Lumin expert on 03300 564 446 to find out more, or email info@luminwealth.co.uk.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
