05/03/20How using a trust could save UK families £300 million each year
Back in 2017, more than 35,000 term life insurance policies paid out an average of more than £78,000. Nearly every claim was paid (98%) and tens of thousands of families/beneficiaries were supported following an unexpected bereavement, to the tune of £2.79 billion.
However, HM Revenue and Customs’ figures from the same tax year (2016/17) show that almost 8,000 life insurance policies with payouts worth £774 million fell into the Inheritance Tax net, triggering the 40% tax and an average bill of £37,500.
The number of life insurance policies which are subject to Inheritance Tax has risen in recent years, yet avoiding thousands of pounds of potential tax can be done simply through the completion of a form.
Families paying £300 million in unnecessary Inheritance Tax (IHT)
In 2016/17, families paid more than £300 million in Inheritance Tax on the proceeds of life insurance payouts.
This represents an 11% increase compared to the previous tax year, when more than 7,000 policies with payouts totalling more than £700 million resulted in £280m ending up in the hands of the Treasury.
If these policies had passed into a trust on the death of the policyholder, HM Revenue and Customs would not have been able to make a claim if they pushed an estate above the IHT threshold of £325,000.
Sean McCann of insurers NFU Mutual says: “The prospect of paying IHT on a life insurance policy that is supposed to protect your family should the worst happen is all too frequently a nasty surprise for thousands of bereaved families, and the latest numbers show more and more people are being caught out.
“But by contacting their provider and completing a trust form, families can potentially remove the threat of their loved ones facing a costly and unexpected bill.”
What does writing life insurance in trust mean?
A trust is a legal arrangement where the trust takes ownership of certain assets, such as the proceeds of a life insurance policy.
When you set up your life insurance, you appoint a trustee or trustees to oversee the trust. Often these are friends or family members, but they could also be someone like a solicitor. The trustees ensure any assets contained within the trust are passed to your named beneficiaries (often your partner or children).
When you place an asset in trust, you cede ownership of the asset to the trustees. The reason this is important is that, when you die, the life insurance policy is handled separately and does not form part of your estate. So, the proceeds of the policy will not be subject to IHT if the value of your estate exceeds the IHT threshold (currently £325,000).
Other benefits of writing life insurance in trust
A key benefit to writing life insurance in trust is that it ensures the proceeds do not form part of your estate for IHT purposes.
Another reason to consider using a trust is that probate can be a lengthy process. By writing your life insurance in trust, it can reduce delays and ensure your beneficiaries receive the proceeds much more quickly.
This can be a huge benefit if you need to continue to meet commitments such as a mortgage, or to meet funeral or other expenses.
Another advantage of writing your life insurance in trust is that it gives you control over your assets. When you put your policy in trust you can decide who to appoint as both your beneficiaries and your trustees. You can choose trusted people to look after your assets, and choose where you want your money to go on your death.
Setting up a trust is particularly important if you are not married or in a civil partnership. Without one, your assets may not transfer to the intended recipient.
How do you write a life insurance policy in trust?
Writing a life insurance policy in trust is easy. Most insurers give you this option when you take out the protection, and there is usually no charge for doing so. If you are not sure, speak to your financial adviser or to the insurer and ask them to supply you with a trust form.
In the future, people taking out life insurance might not even have to complete a trust form. A report by the independent Office of Tax Simplification (OTS), commissioned by the former Chancellor Phillip Hammond, said that all life insurance policies should automatically pass into trust.
The OTS argue that this would make the system easier to understand and avoid people being unfairly caught out.
If you are thinking of taking out life insurance, or you are looking for advice about trusts, we can help. Please get in touch to find out how.
This is based on the current legislation (February 2020). Bear in mind, any changes to these rules, or to your personal circumstances could affect what you get in the future.
The Financial Conduct Authority does not regulate estate planning, tax planning or trusts.