Inheritance Tax Overpayments: The Importance of Trusts for Life Insurance Policies
Recent data reveals that many estates may be unnecessarily overpaying inheritance tax (IHT) due to life insurance policies not being placed in trusts. This comes as IHT receipts continue to rise, highlighting the need for proper estate planning.
According to NFU Mutual, out of 27,800 families paying IHT in 2021/22, 6,810 estates included life insurance policies that could have been exempt from IHT if placed in a trust. The total value of these policies amounted to £819 million, potentially resulting in £327 million of unnecessary tax payments.
This occurs where many people buy life insurance without guidance, unaware that policies not in trusts are included in their estate and could be taxed at 40%!
It is important that policyholders contact their providers and request trust forms, the process is relatively straightforward. Typically placing a policy in trust has no IHT implications if done while in good health. However, HMRC might challenge the arrangement if the policyholder is seriously ill at the time of trust creation and dies within seven years.
An additional benefit of using trusts is the potential for faster payouts to beneficiaries, as you can bypass the often lengthy probate process. This can be crucial for dependents relying on the funds for daily expenses.
HMRC collected £7.1 billion in IHT receipts for 2022/23, a £2 billion increase compared to the average of the previous three years. With tax-free allowances frozen for another four years, more individuals are likely to face IHT charges in the future.
MCC Partners, recognizing the complexity of these issues, works closely with protection advisors JB Partners to ensure clients receive comprehensive advice on life insurance and its implications for inheritance tax planning. This collaboration aims to help individuals make informed decisions about their policies and potentially save their beneficiaries from unnecessary tax burdens.
As the IHT landscape becomes increasingly complex, seeking professional advice from firms like MCC Partners and JB Partners can be crucial in navigating these financial challenges and optimizing estate planning strategies. For a free consolation please call and book today!
