Guides and Info

Life Insurance & Inheritance Tax

Inheritance Tax and life insurane

There is not a specific life insurance tax applied to the money paid to your family or beneficiaries. It may be subject to Inheritance Tax if it forms part of your estate.

Inheritance Tax, is a tax on the net value of an individual’s estate in the event of their death. This is calculated to include pensions, savings, properties and investments.

Do I Have To Pay Inheritance Tax On Life Insurance?

Do I Have To Pay Inheritance Tax On Life Insurance?

There is normally no Inheritance Tax to pay if the value of an individual’s estate is below the £325,000 threshold (2019/20 tax year) or they leave everything above the £325,000 threshold to their spouse, registered civil partner, a charity or a community amateur sports club. Whether the estate is above or below the threshold of £325,000 the deceased’s legal personal representatives will still need to report this to HMRC.

The standard Inheritance Tax rate is 40%. This is only charged on the part of your estate that is above the threshold. So to calculate this value of the estate, add all assets together including pensions, savings, property and investments. This will give you the total of the individual’s estate, reduce the total by £325,000, which is your individual inheritance tax allowance. All money above the total is taxed at 40%.

Married, Civil Partner Benefits

However, If the deceased was married or in a registered civil partnership. The estate will pass to the surviving spouse or their civil partner. The unused benefit is transferred to the surviving spouse or civil partner. Their estate, in turn, will then be subject to Inheritance Tax when they pass away. But the good news is that their threshold can be as much as £650,000.

£325,000 may sound like a very generous threshold. But when you start looking at what may be included in that total. It suddenly it doesn’t seem so much once you factor in the average value of property, investments, life insurance policies and any other assets. Once upon a time most Inheritance Tax liability was the preserve of the wealthy. As properties in the UK have increased in value. A larger number of the UK population now have the extended risk of Inheritance Tax Liability through no fault of their own. Many homes within built up areas exceed the threshold for Inheritance Tax. Causing people to re-evaluate the use of trusts and wills in the event of their death.  

Putting Life Insurance Into Trust

The standard method of buying life policies to protect their families and loved ones. Usually Life Insurance protection or mortgage protection will form part of the individual’s estate for Inheritance Tax calculations. The lump sum that should have been used to give the family and loved ones a financial cushion could be dramatically reduced. One method to avoid this outcome is to place their life insurance policy under trust. 

What Is A Trust

A Trust is a legal arrangement which allows the owner of a life insurance policy (the settlor) to give their policy to a trusted group of people (the trustees), who look after it. At some point in the future they can pass it on to people from a group that the settlor has decided (the beneficiaries). Subject to the trust chosen the trustees will normally have the discretion about to decide which of the beneficiaries to pass it on to, how much each will get, and when. Trustees can be family members, trusted friends or legal representatives.

Trust v Probate

An added benefit of using a trust for the purposes of speed. It will help to ensure that the money paid out from the life policy can be paid to the family or beneficiaries quickly. Without the need for lengthy legal processes. When the settlor dies, your personal representatives or legal representative will need to obtain probate. So that they have the authority to deal with your estate. In England and Wales either a ‘grant of probate or grant of letters of administration’ is issued to your personal representatives. This process takes time and the individual dies without having made a will it takes even longer. Since the trustees are the owners of a policy placed in trust. They do not have to go through this process in order to make a claim.

If you have joint life policies, both of you must agree to your policy being placed into a trust. This will need to be documented to ensure compliance with the legal system. Without the correct documentation in place it could hinder the settlement process.

Our team of specialist advisors will be able to fully explain the trust process to you. Also we work with many other providers who may help with inheritance tax and wills.