Inheritance Tax Trap: Don’t Get Caught Out!
28th August 2024
Has the Inheritance Tax Trap caught you out?
Inheritance Tax (IHT) receipts continue to rise. There may be some who have unnecessarily overpaid due to life insurance not being in a Trust. According to NFU Mutual, 6,810 estates that paid IHT in 2021/22 included life insurance policies which could be exempt from the charge if it were put into a Trust. There were 27,800 families in total paying IHT in 2021/22.
Putting Life Insurance Policies Into A Trust
Many people buy life insurance without advice. They may be unaware that if they don’t put the policy into a Trust, then it is included within their estate. This could then end up being taxed at 40%.
Putting life insurance policies into a Trust is relatively straightforward. If you have life insurance and it isn’t in a suitable Trust structure, we would strongly advise that you contact your provider and ask for a Trust form. In total the life insurance policies were worth £819m, meaning approximately £327m of Inheritance Tax could have been paid unnecessarily.
Provided you are in good health when you put such policies into a Trust structure, there are normally no IHT implications. As in most cases the policy has no value.
If you are seriously ill when you put the policy in Trust and die within seven years, HM Revenue and Customs could argue that the policy had a value when you put it into Trust. They could seek to include that value in your estate and charge Inheritance Tax on it accordingly.
Using a Trust can also mean a speedier payout in the event of a claim being made, as chosen beneficiaries won’t need to wait for probate, which can make a huge difference to dependants relying on the money to cover day-to-day bills, following an individual’s death.
For the 2022/23 tax year, HMRC received £7.1bn in Inheritance Tax receipts. This is £2bn more than the average over the previous three tax years. More people will be dragged into paying the charge, as Tax-free allowances are frozen for a further four years.
Upcoming Autumn Statement Announcements
Please be aware, that Autumn Statement announcements will be made by the Chancellor on Wednesday 30th October 2024. Keep in mind that these announcements could alter the current Inheritance Tax legislation.
Get In Touch
For more information or advice on dealing with Inheritance Tax, contact your local Whitings LLP office today.
Disclaimer - All information in this post was correct at time of writing.
