Life insurance and Tax

There are many people that do not realise that if they inherit a life insurance pay out then they may have to pay inheritance tax on it. They may just assume that they will get a pay out that will cover debt and other expenses and do not think about the fact that the sum will attract tax. There are things that can be done about this though, to protect you from losing the money from the tax.

Estate Value

It is worth considering whether the estate will be worth enough to attract inheritance tax. This figure does vary, so if you are close to the boundary or over it, then you need to consider that it could be possible that tax will have to be paid. It is worth noting that any money inherited over the inheritance tax threshold will be taxed at 40% which is a pretty big hit. If you needed the insurance to cover a certain value, then you may need to pay in extra so that the pay out is larger and therefore when it is taxed, the inherited sum stays the same. This may seem rather annoying and unfair in a way. However, there is a way around it.

Set Up a Trust

It is possible to set up a trust which will keep the asset separate from the estate . This means that it belongs to the person who will inherit it rather than the person whose life is being insured. This means that it will avoid the 40% tax. There is also a benefit in that because the money isn’t part of the estate there will be no delay in paying out as you will not have to wait for probate to be granted on the account. It is a very simple process, there is just a form to fill out and it is likely that it will not cost anything. The trustees will just have to produce a death certificate with the trust certificate in order to get the money. You may use family members as trustees or you could use a solicitor.

So it is actually quite easy to make sure that your life insurance policy does not attract inheritance tax. This can be set up on any type of term assurance including that taken out to pay off a mortgage when the home owner dies. Even if you think your estate will not be worth that much, it can be worth doing anyway, as it can cost nothing and can save a lot of money. If you do not set it up now or when you take out life insurance, then you may forget in the future and find that your estate is worth more than you expected or the thresholds for inheritance tax have been lowered. If this happens tax may be due and you could have taken a few simple measures to prevent it.