This is a handy guide on IHT and the benefits of a Life policy being in force, here’s the word from L&G;
For many, Inheritance Tax (IHT) is a saving grace at the time of a loved one’s passing, particularly if they were the main financial provider for their family. Recently, there have been changes to legislation surrounding Inheritance Tax, with new limits being set in the coming months and years. Major changes include; non-domicile status being abolished from April 6th 2025 and pension pots becoming taxable assets from April 6th 2027. To help navigate these changes L&G has provided a guide explaining how life insurance can be used to minimise the impact of the new tax legislations.
How can life insurance help with Inheritance Tax?
A life insurance payout can provide a cash sum large enough to cover an Inheritance Tax bill, preventing the need to sell other assets to cover this charge. Advisers can provide a whole of life protection plan which could also be used for inheritance liabilities.
By writing your life insurance into a trust, you can protect your beneficiaries from Inheritance Tax.
Why is life insurance relevant to Inheritance Tax, and how is it affected?
The total value of a person’s estate refers to total assets minus their total debts at the time of death. This value includes the cash sum(s) of a life insurance policy (death benefit), and if the total value is greater than the threshold for Inheritance Tax, the excess will be subject to a rate of 40%. However, putting your policy in a trust can protect your beneficiaries from Inheritance Tax charges.
For individuals, the current threshold for the 40% tax stands at £325,000; this threshold doubles for married couples and civil partners to £650,000.
What are the rules for: payouts, deductibility and tax relief on life insurance?
Outside of an estate’s total value exceeding the threshold, life insurance isn’t typically taxable, although interest earned on a policy during the period between death and the payout may be subject to Income, or Capital Gains Tax.
Life insurance premiums paid to an insurer are not tax deductible and therefore HMRC will not view these as an allowable expense to write off but they can be treated as a gift when placed into a trust for Inheritance Tax purposes. Also, estates are subject to ‘taper relief’, reducing tax on lifetime gifts commonly resulting in no payable Inheritance Tax after a 7-year period.
Despite tax relief not being available, there are notable IHT benefits of putting a life insurance policy in trust. Often gifts placed in trust are subject to an instant IHT charge although this normally doesn’t apply to life insurance. Additionally, the policy premiums count as ‘regular gifts made from income’ fitting within the boundaries of the ‘annual gift allowance’ usually resulting in IHT exemption as well.
Should I put life insurance into a trust?
Placing a policy in a trust removes it from your estate, giving ownership to a trustee and ensuring beneficiaries receive the full amount. The probate process (dealing with the person’s estate after death) doesn’t apply to the trust, often meaning payouts to beneficiaries are a quicker process.
Understanding the technicalities of Inheritance Tax is a difficult task, especially as new changes are being implemented. It is recommended you seek advice from a qualified financial adviser prior to making major changes to your life insurance policy.
Regardless of individual financial circumstances and needs, it’s crucial to remain informed about tax changes and their potential impact on your financial plans and, ultimately, your beneficiaries.
To find out more about life insurance and Inheritance Tax, please visit here: https://www.legalandgeneral.com/insurance/life-insurance/guides/life-insurance-and-tax/
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