Over 90% of life insurance policies could count towards IHT limits

Published: 26/03/2015

Analysis conducted by Legal & General has revealed that less than 10% of customers are putting their life cover policies into trust and so over 90% of life policies could count towards Inheritance Tax limits.

Without a trust in place any lump sum received when a life insurance policy pays out will form part of a deceased’s estate and may be subject to Inheritance Tax. With the current Inheritance Tax threshold of £325,000 and the recent rises in property prices there are many who will find their estates liable for Inheritance Tax. Tax is payable on the part of an estate above the £325,000 threshold at a rate of 40%.

If a life insurance policy is written in trust any policy proceeds can be paid directly to the trustees of the trust who can then share this amongst the beneficiaries rather than the proceeds being paid to the deceased’s estate. In this way the insurance proceeds will not be taken into account when inheritance tax is calculated and the overall value to the estate may remain under the threshold. Another benefit is that these proceeds can be paid out without a Grant of Probate or Letters of Administration being required.

Research shows that £530 million was ‘lost’ to Inheritance Tax in 2014 because the policies were not placed in trust and this is a £58 million increase on 2013.

Head of Wills and Probate Linda Cummins comments:

“For many people, taking action to minimise inheritance tax liability in this way can have considerable financial benefits ensuring that the insurance policy proceeds go to the beneficiaries. After all, that’s why the life insurance policy was taken out in the first place.

“Estate planning can be a sensitive area for many and writing a Will or drawing up a trust is routinely avoided as these statistics show. However, overcoming those barriers, making a Will and putting a life insurance policy in trust is not as daunting as it sounds and can give real peace of mind.”

Content correct at time of publication