Taking out life insurance is something many of us do to protect our families in the event of our death.  However, doing so can unwittingly tip your Estate over the inheritance tax threshold, and mean that your beneficiaries will have to pay HMRC a chunk of the money you had intended them to receive. Solicitor Lucy Wilton explores this topic.

Many people are unaware that sometimes these life insurance policies can unintentionally be the difference between Estate Administration requiring a Probate application or not.

There is an array of different products available, with some policies even directed specifically for the payment of inheritance tax where your Estate is expected to incur a liability. This can assist those left behind with worries about how to raise funds to pay tax. Finding out your inheritance tax position by discussing your Estate planning with a solicitor can help you with deciding whether a policy would be useful, or even if an existing one needs amending.

Unforeseen implications regarding Inheritance Tax

It is common for people to buy life insurance policies without any financial or legal advice. They don’t realise that by doing so, their Estate can unintentionally be exposed to higher levels of inheritance tax. At present, inheritance tax is set at 40% for Estates which exceed the current threshold.

A Trust can be the answer

It’s a real shame that such a large number of people are being caught out by this as it is usually relatively simple to put this type of policy into a Trust, preferably at the outset of setting it up, and in doing so, to save a significant amount of tax being levied on the Estate as they then generally run outside of a person’s taxable affairs upon death (for inheritance tax). 

Speedier access

Another advantage of putting a life insurance policy into a Trust is that it is quicker for your beneficiaries to receive the money on your death as they would not need to wait for Probate, which itself can be a lengthy process often taking between 6-12 months.

£327m Inheritance Tax paid unnecessarily in 2021/2

Figures from HMRC which were analysed by NFU Mutual found that in 2021/2, almost 7,000 Estates paid IHT on Estates which included life insurance policies.  This IHT tax liability could potentially have been reduced by putting the payouts from the life insurance policies into a Trust. The value of the Estates analysed by NFU mutual came to nearly £820m, meaning that up to £327m of IHT may have been paid on them unnecessarily!  Ouch.

I already have a life insurance policy, can I put it into a Trust now?

If you already have a policy, you can ask your provider if you can make the amendment. You’ll need to understand how your Trust works, and it’s strongly advised that you get advice from a financial adviser in conjunction with a solicitor.

I am about to take out a life insurance policy, how do I ensure it is paid into a Trust?

When you purchase a new policy, your provider may be able to help you put it into a Trust. You can usually do this right away or later by filling out a Trust form. If you are unsure, a solicitor can assist you with approaching an appropriate advisor in the context of your wider estate planning work.

Get in touch

If you’d like to speak to our friendly and experienced team about putting your life insurance policy into a Trust, you can email us info@penderlaw.co.uk or call us on 01872 241408.