Inheritance tax

Posted on: 29 July 2011 by Peter McGahan

Is life insurance liable?

Q: I have just found out that my life insurance could be liable for UK Inheritance tax. Is this correct?

A: This was a question we received recently from one of our clients. In simple terms, UK inheritance tax is a charge of 40% on any assets valued at more than £325,000 transferred from someone’s estate. So, if you have a house, savings, life insurance and pension pots not placed into trust which is all valued at, say, £425,000, the inheritance tax bill would be £40,000. 

In far too many situations on death there are simple measures that could have been taken that would have saved thousands of pounds.

Take life insurance as an example. A simple trust document signed at the time the policy is set up will put the life insurance benefit outside your estate and when it is paid over to beneficiaries, it will be free of UK inheritance tax. This means your family would receive the full amount. 

If you have a pension policy, be sure you have written out the very simple expression of wishes form to state where you want your pension to go if you die early. This form should then ensure your pension doesn’t form part of your estate and no UK Inheritance tax will be payable on it. 

There are also two parts to most of our pensions, namely protected and non-protected rights. Many people complete the above 'expression of wishes' form for the non protected part of their pension, but forget they also need to complete it for the protected part. In a case we saw just last week, this created a UK Inheritance tax liability, for an amount forty times the cost of the solicitor’s bill. All because of one missed form that would have taken less than one minute to complete.

Since 2007 you have been able to take on your spouse’s nil rate band, so on the second death of a couple, an estate would have to be valued at more than £650,000 to have to pay UK inheritance tax. It may surprise most of us, but when you add your pension fund, life insurance, house, savings and investments, many estates will soar through this limit.

Indeed, those who pay UK Inheritance tax on average pay £80,000, with nine out of ten of us failing to take the simplest of steps. (1) IFA Promotion’s research also showed that over £1.3bn was wasted per year and that 88% of the public had done nothing at all to reduce their exposure to this tax.

As well as the above ‘simple steps’ there are a number of other ideas you could consider: Firstly, rather than the government making the decision about what happens to your assets, make a will. Use a solicitor to do this as they will be fully qualified in all aspects of estate planning and will ask you about things you don’t know you don’t know!

 Make regular gifts out of your normal income to your children or beneficiaries. As long as the gifts are regular, don’t affect your standard of living and are out of your income they will not be liable for inheritance tax. 

You could leave the country and scoot off to Andorra, New Zealand or other places where currently there is no inheritance tax but you would need specialist Inheritance tax advice  on that as you could still be liable for inheritance tax in the UK on all your worldwide assets if you fail to make the correct changes to your estate. 

For example, if you continue to hold sporting club membership, have detailed you wish to be buried in the UK, still own a UK home, or return too regularly to the UK, you may well find you are deemed to be domiciled in the UK and therefore liable for UK Inheritance tax.

Other simple tips are to consider purchasing assets which may attract business or agricultural relief at 100% of the UK inheritance tax liability. Or you could choose the simple, but most expensive option of insuring yourself against the tax. We have listed only a small section of the possibilities but with careful planning now, Inheritance tax can easily be mitigated.

For a free one-hour inheritance check, mention this column and call Worldwide on 0845 230 9876, e-mail  or take a look at our website .

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