Legal & General (L&G) has urged people to put life cover policies in trust in order to mitigate inheritance tax (IHT) liabilities for loved ones left behind after their death, after its research found that the vast majority of policyholders could be exposed to the tax unnecessarily.
L&G's study of its own customer base found that less than 10% of its customers have placed their policies in trust. The lump sum received from a life insurance policy counts towards a person’s estate when they die and is therefore liable for IHT if over the tax-free allowance. By writing a life insurance policy in trust, the amount the policy pays out on death can be paid directly to the trustees of the trust rather than the deceased’s legal estate. This means the proceeds won’t be taken into account when IHT is calculated.
The IHT threshold in the UK for individuals is £325,000. Currently IHT is due at a rate of 40% on anything above this amount.
Protect your loved ones with a life insurance policy
At risk
L&G customer data shows that only around 6-8% of its customer’s life policies are currently placed in trust leaving many policyholders at risk of being liable for the tax.
Rcent figures suggests that £530 million was ‘lost’ to IHT in 2014 by not placing life insurance policies in trust. That's an increase of £58 million compared to 2013.
L&G warns the risk may be even more acute for unmarried couples. Office of National Statistics (ONS) figures show 12% of the UK population (or 5.3 million adults) are living together out of wedlock, but UK law does not recognise this group in the same way for tax purposes.
[SPOTLIGHT]Married couples can make use of each other’s tax-free allowance. This means if part of the allowance was not used on the first death it can be transferred to the surviving partner on their death. So the surviving partner’s estate can be worth up to £650,000 before any IHT is due.
But the same rules don’t apply for unmarried couples. Assets shared by unmarried couples like the family home or protection policies is counted towards their estate based only on their individual allowance so may push surviving partners over the IHT threshold.
Protect your loved ones with a life insurance policy
How to put your policy in trust
In order to put a single or joint life cover policy in trust you just need to create a trust deed.
This can be done with your provider when you take out your policy out or later on. There will usually be no extra charge, or at most a small fee.
The deed sets out the terms that the trust can operate under like who you would like to be a trustee (the person who will look after your policy and share out the proceeds), who you would like to benefit and how much each beneficiary gets.
You should bear in mind that placing a policy in trust is an irrevocable act so you should think carefully if it’s the right move for you.
The type of trust you can get will vary with providers; some don’t allow you to change the beneficiaries once named, while others do.
L&G has introduced a new online hub for L&G protection policy holders. The hub can help people identify a suitable trust for their existing or new policy and create a deed in just a few minutes.
For more ways to limit your IHT liability read How to cut your Inheritance Tax bill.