Inheritance tax explained by Interactive Investor expert
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Over 6,000 estates paid inheritance tax on life insurance policies according to the latest data from HM Revenue and Customs (HMRC). NFU Mutual is letting the public know they could have escaped paying an expensive IHT bill if their policy was written into trust. Inheritance tax is paid on a person’s estate, including their money, possessions and property, after their death.
If someone’s estate is valued higher than the £325,000 threshold, it is subject to this form of taxation.
Out of the 22,100 estates that paid inheritance tax in 2018/19, over a quarter of them included life insurance policies.
Said life insurance policies came to a total of £709million all together. This means more than £280million of IHT may have paid out on them.
However, if these insurance policies were written into trust, they would not normally be a part of the deceased’s estate, NFU Mutual warned.
This means that the policies are not liable for inheritance tax and would therefore not lose families a great deal of money.
Trusts are widely known as one of the great inheritance tax saving measures and are regularly used to reduce bills.
Sean McCann, a chartered financial planner at NFU Mutual, outlined specifically how taxpayers can reduce their IHT bill and save money on their estate after they have passed away.
Mr McCann explained: “Many people buy life insurance without advice, so aren’t aware that if they don’t put the policy in trust it’s included in their estate and could end up being taxed at 40 percent.
“Putting life insurance policies into trust is relatively straightforward. If you have life insurance and it isn’t in trust, phone your provider and ask for a trust form.
“Provided you’re in good health when you put it into trust, there are normally no inheritance tax implications, as in most cases the policy has no value.
“However, if you are seriously ill when you put the policy in trust and die within seven years, HMRC could argue that the policy had a value when you put it into trust and seek to include that value in your estate and charge inheritance tax.
“Using a trust can also mean a speedier pay out in the event of a claim, as the family 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.”
Recent data from HM Revenue (HMRC) has revealed that the Government took in almost £600million more in IHT between April and December in 2021.
Overall, this means the total amount received by HMRC in inheritance tax receipts stands at £5.9billion. This represents a sharp rise from £5.2billion registered in 2020.
Specifically, this amount comes from deaths that happened some time before, due to the extended period of time it takes for estates to get through the probate system.
On how IHT bill receipts are on the rise, Mr McCann added: “Inheritance tax is currently feared by many but paid by few.
“The Chancellor has frozen the tax-free allowances for the next five years, meaning more and more families will be caught in the net.
“This makes it all the more important that families don’t pay inheritance tax on life insurance policies unnecessarily.”
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