No one likes to pay any kind of tax, but many of us prefer not to even think about Inheritance Tax at all.
Inheritance Tax, or IHT, is a tax we never have to pay, because it is levied on our estates – the property, money and possessions we leave behind. However, although we don’t pay it ourselves, it can take a big chunk out of what our loved ones receive.
Most of us would prefer that our loved ones receive our wealth when we die, rather than the taxman. But more people than ever are paying the death toll, often seen as an unfair levy on money that we have already been taxed on.
Are you liable for IHT?
It is easy to imagine that IHT need not concern us, because it is only aimed at rich people. But you don’t need to be a member of the landed gentry to be caught by it these days. The individual threshold (The nil rate band tax year 2020/21) for Inheritance Tax is just £325,000. Go past that figure –easily done thanks to high property prices and some large pension pots in schemes where these may not be written in trust – and your estate becomes taxable. If we don’t take the right precautions while we are alive, the taxman can help himself to 40% of everything above the threshold, leaving your loved ones much worse off. (Surviving Spouses or Civil Partners may be able to transfer any unused relief on the death of their partner/ spouse).
The Treasury took home a total of £5.2bn in 2019-20 which highlights the need for you to look at your current circumstances to assess if there is anything you can do to mitigate your own IHT liability.
How to save a fortune with a single stroke of the pen
Avoiding this unpopular tax simply involves taking care with your life insurance policy paperwork.
In other words, the pay-out of £100,000 you bargained for would be worth just £60,000 after IHT. But you can legally reduce your IHT by writing your life policy in trust.
A trust is a legal arrangement where you give cash, property or investments to someone else – or to an insurance company so they can look after them for the benefit of a third person. When a policy passes into a trust on the death of the holders, the funds it provides are protected from IHT. Writing a life insurance policy into trust typically requires filling out a simple form, and it may be as simple as ticking the right box when you apply.
In fact, many insurance policies will automatically be written into trust, meaning the money paid out to your family should you die is ring fenced and falls outside of your estate for tax purposes. The payout can then be passed to your chosen beneficiaries without fear of taxation.
If your policy does not automatically pay out into a trust arrangement, you can write it into trust by contacting your insurer who should be able to do it for you.
There is nothing underhand about this. A recent report by the independent Office of Tax Simplification, commissioned by former Chancellor Phillip Hammond, said all policies should automatically pass into trust. It said this would make the system easier to understand and avoid people being unfairly caught out.
In fact, a whole of life insurance policy can provide a simple way to deal with your IHT liabilities. Take out a policy in trust, and your executors can use the proceeds to offset the IHT bill. Obviously, the younger you are when you take out the policy, the less it will cost, so to make economic sense, you will need to do this early in life.
Whatever the answer you need for your IHT questions, getting expert advice, and getting it as soon as possible will help. Simply call us at Continuum for the advice you need.
The information contained in this article is based on the opinion of Continuum and our understanding of current HMRC tax rates for tax year 2020/21 and does not constitute financial advice or a recommendation to suitable Inheritance tax strategy, you should seek independent financial advice before embarking on any course of action.
The levels, bases and reliefs from taxation may be subject to future change.
The Financial Conduct Authority does not regulate taxation & trust advice and will writing.
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