Are your Life Insurance policies in trust?

Most people are advised to take out life insurance when they buy a home to cover the mortgage and also ensure their children are protected in the event of early death. However, more than half a billion pounds is set to be wasted this year in Inheritance Tax as individuals fail to place their life protection policies “under trust”.

The figure, which is up £58m on last year, also found that only a quarter of consumers would be confident in tackling Inheritance Tax planning without the help of a professional independent financial adviser. However. many people now take these plans out on the phone or online without advice and end up making a big mistake.

If you  fail to put a policy “under trust” could reduce a £100,000 life insurance pay-out by up to £40,000 if an individual’s estate is worth more than £325,000.  It said that this could leave families at risk of a “sizeable tax bill”.

The problem gets more serious on the deaths of both husband and wife if they leave children under 18. Not only is the estate significantly reduced but the children inherit all the money at age 18 which most parent consider far too young.

The government is not helping as recently HMRC recently proposed a limit to the amount an individual can transfer into a series of trusts tax free. In a paper, the government body suggested that each settlor be entitled to a tax free “settlement” nil-rate band that runs separately from, and in line with, the IHT nil-rate band.

If the proposals become law, trustees of all trusts set up by an individual settlor will have one nil rate band (currently £325,000) to share between them in proportions chosen by that settlor. This will inhibit IHT planning strategies, based on the “Rysaffe principle”, which use multiple trusts to reduce the IHT charge on each tenth anniversary of the trust, and on distributions to beneficiaries.

Inheritance tax and estate planning is getting more complex with every passing year and should only be undertaken with experienced advice.