Safeguarding your Life Insurance
Is your Estate Protected from Inheritance Tax?
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Life Insurance and Inheritance Tax
Inclusion in the Estate
If your life insurance policy is not written in trust, the payout from the policy is considered part of your estate. This means that if the total value of your estate, including the life insurance payout, exceeds the inheritance tax threshold (currently £325,000 in the UK for the 2023/2024 tax year), the excess amount will be subject to inheritance tax at a rate of 40%.
For Example
- Total Estate Value: £500,000
- Inheritance Tax Threshold: £325,000
- Amount Subject to IHT: £175,000
- Inheritance Tax Due (at 40%): £70,000
Impact on Beneficiaries
Including the life insurance payout in your estate can reduce the net amount your beneficiaries receive. After the inheritance tax is deducted, the remaining assets, including the life insurance proceeds, are distributed according to your will or the rules of intestacy if no will is present.
If there is a mortgage secured on your family home, there may not be enough money left in your life insurance to pay this off, which could result in your family being forced to sell the family home and move at a time when they are mourning your loss.
Mitigating the Impact: Writing Your Policy in Trust
One of the most effective ways to prevent your life insurance payout from being subject to inheritance tax is to write the policy in trust. Here’s how it works:
What is a Trust?
A trust is a legal arrangement where the life insurance policy is owned by the trust rather than you personally. When you pass away, the payout is made directly to the beneficiaries named in the trust, bypassing your estate and avoiding inheritance tax.
Benefits of Writing in Trust
- Avoid Inheritance Tax
The life insurance payout does not form part of your estate, so it is not subject to IHT.
- Faster Payout
The payout process can be quicker since it doesn’t go through probate.
- Control Over Distribution
You can specify how the proceeds should be distributed among your beneficiaries.
Taking the Next Step: Contact us Today to Review your Life Insurance
By taking proactive steps such as writing your life insurance policy in trust, you can significantly reduce the inheritance tax burden on your estate. This ensures that your beneficiaries receive the maximum benefit from your life insurance payout, providing them with financial security and peace of mind.
For personalised advice and assistance in managing your estate and life insurance, schedule a consultation with our expert advisors today. Secure your legacy and protect your loved ones from unnecessary tax liabilities.
Estate Planning is referred to a third party. Neither Liddle Perrett Ltd nor PRIMIS are responsible for the service received. These services are not regulated by the Financial Conduct Authority and may have limited consumer protection.
The guidance and/or advice contained in this website is subject to UK regulatory regime and is therefore restricted to consumers based in the UK
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Liddle Perrett Ltd registered in England at Cowden Close, Horns Road, Hawkhurst, Kent, TN18 4QQ (number 07103116). Liddle Perrett Limited is an Appointed Representative of PRIMIS Mortgage Network, a trading name of First Complete Limited which is authorised and regulated by the Financial Conduct Authority for mortgages, protection insurance and general insurance products