Thousands of families are needlessly paying inheritance tax by structuring their estate planning the wrong way.
Almost 5% of UK deaths resulted in an inheritance tax (IHT) charge in 2023/24, up 0.1% from the year before, according to the latest HMRC data, with liabilities totalling £7.03 billion.
The total number of UK deaths that resulted in an IHT charge was 30,400.
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This included 6,990 estates containing life insurance policies worth £852 million. However, these particular estates could have avoided an IHT charge if the life insurance policies had been written into trust, experts at wealth manager Evelyn Partners said.
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Ian Dyall, head of estate planning at Evelyn Partners, said: “The fact that nearly 7,000 tax-paying estates contain substantial life insurance payouts is quite staggering.”
Life insurance pays out a lump sum or regular payments to your loved ones if you die. How much is based on the level of cover you’ve taken out.
Life insurance payouts can be used by beneficiaries to cover the IHT bill on an estate quickly, rather than having to sell off assets or fund the bill themselves.
But, life insurance policies are typically included within your estate, meaning any payout is subject to IHT – this is where putting a policy into trust comes in.
The benefits of writing a life insurance policy into trust
When a life insurance policy is put into a trust, also known as ‘writing’ it in, it generally falls outside of your estate and is paid out when you die.
This means your beneficiaries don’t owe IHT on the payout.
A payment coming from a life insurance policy written into trust also means your beneficiaries don’t have to wait for probate to be granted to receive the payout.
Duncan Mitchell-Innes, partner and deputy head of private client at TWM Solicitors, said: “Life insurance can be a powerful estate-planning tool, but only when structured correctly. If not held in trust, the policy may be taxed for IHT and tied up in probate, defeating its purpose.”
Inheritance tax will affect more families in the future as unused pensions are set to be included in people’s estates from April 2027. The government estimates the change will increase the average IHT liability by around £34,000.
Mitchell-Innes said this made it all the more important for life insurance policies to be written into trust to lower eventual IHT bills.
He said: "With the recent changes to IHT, life insurance remains one of the few effective tools for families to protect their estates. However, it is crucial to structure these policies correctly to maximise their benefits."
Are there any drawbacks to writing a life insurance policy in trust?
Tim Grimsditch, managing director at financial advice platform Unbiased, said the biggest drawback to trusts is their rigidity.
He said: “A trust is generally irrevocable – once it's set up, you usually can't simply change your mind.
“With a fixed trust the beneficiaries are effectively locked in, which becomes a real problem when life changes: a divorce, a falling-out, or a new child. The decision you make today has to survive decades.”
Another disadvantage to writing a life insurance policy into a trust is that there can be tax implications, depending on the type of policy.
For example, some policies held in discretionary trusts can face a 10-yearly 6% IHT charge on any value over the nil-rate band.
You can also sometimes be charged legal fees for putting a life insurance policy into a more complex type of trust.
How to write a life insurance policy into trust
Most providers have an online trust section on life insurance applications which you can tick to write it into trust.
Usually, you will have to fill out and sign a paper form as well.
If you want to transfer an existing policy into a trust, you may need to get a financial advisor to help you, which could incur further costs.
