By Louise Misiewicz
Do you have life insurance?
Will your life insurance cause you an IHT headache?
Many people will buy life insurance to pay out on the event of their death. There are good reasons why this would be beneficial:
- Pay off mortgages on buy-to-let property investments
- Pay of any IHT liabilities
Many property investors are blissfully unaware that their children and their spouses may have to go through the mortgage application process. This is especially the case where one partner is the sole name on the mortgage deeds.
It is beneficial for the insurance to pay out the lump sum into a Trust fund. The main benefit of this is that the lump sum is not taking into the estate of the deceased. As such there are no impact on IHT of the insurance payment.
According to insurer Aegon, only 6% of life-insurance policies in the UK are set up in this way, which can only mean that a lot of families are incurring IHT bills unnecessarily.
Adviser website Unbiased estimates that because of this, some £530million will be paid out needlessly in IHT this year on life insurance policies. That is inflated in part by soaring house prices that have seen thousands more households breach the £325,000 IHT threshold on estates.
The additional benefit of having lump sum insurance payments paid into Trust is the speed of receiving the money by the beneficiaries. As the payment is not paid into the estate, there is no need to go through the formal process of reviewing Wills or going through the more complex process of Probate.
We discussed the importance of creating a Will and Probate issues in our previous article.
There are a few articles below that are worth reading about IHT:
- Inheritance (IHT) Tax Planning – Getting The Basics In Place
- Inheritance Tax (IHT) Allowances Transferrable To Your Spouse
- How to reduce IHT from 2017
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Our team of property tax experts are on hand to best advise our clients on how to manage inheritance tax planning to ensure that there are no unpleasant surprises.
You need to keep a watchful eye on the insurance companies to ensure that they do not dissolve the Trust if there are no other assets within the Trust.
As the case was seen recently by a client of ours. They thought that the insurance was paid into Trust, until they discovered that HMRC wanted to charge then £40,000 (40%) on the lump sum payment.
We have written a few detailed and useful articles about Trusts below:
- Using A Discretionary Trust For Asset Protection And IHT Planning
- Putting Properties into a Trust
- Gifting Buy To Let Properties To Children Without Capital Gains Tax (CGT) Using Trusts
Putting a life insurance policy into a trust is known as ‘writing life insurance in Trust’ or a policy is ‘written in Trust’.
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Please note that the cost of creating a Trust by an insurance company should be negligible, and indeed free, in many cases. Make sure that the insurance company you are speaking to confirm their charges to you.
It is important that you are specifically excluded from benefiting, in order to avoid a tax charge under the complicated ‘gift with reservation of benefit’ rules.
You may be liable to pay 20% IHT on the insurance policy value when assigned to Trustees, and a possible 20% more should you die within seven years of making the assignment.
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