Life Insurance and Inheritance Tax

Do you pay inheritance tax on Life Insurance?

Making the decision to protect the future of your loved ones by getting the right Life Insurance policy is a brave, but sometimes daunting prospect. As with anything finance-related, the shadow of the taxman can loom over things, and the line between a Life Insurance policy and inherited wealth can be tricky to pin down.


But are Life Insurance proceeds taxable? How much is inheritance tax and does it apply here? Let’s take a look at how you can arrange cover for yourself while not only staying on the right side of the law, but also making things as efficient as possible for yourself and easiest for those nearest to you…

Is Life Insurance taxable?

There is no specific UK tax which affects how a Life Insurance policy pays out. However, depending on the amount you leave for your loved ones, you could be subject to inheritance tax (IHT). IHT is calculated at 40% of the value of your estate, as long as that value is over £325,000 if you’re single or divorced, or over £650,000 if you’re married or widowed.

That might seem like a fairly high point for the tax to kick in. But rising house prices combined with other assets like savings, investments and even family heirlooms can quickly stack up to the point where even average families might be liable.

Most Life Insurance policies count as part of the estate you leave behind for your loved ones. A way to avoid this is to make sure your policy is written ‘in trust.’ Most people have at least heard of trust funds, and Life Insurance written in this way follows the same principles.

What is Life Insurance written in trust?

Here, your Life Insurance will pay out into a trust, managed by trustees who could be members of your family or a legal professional. You also can set guidance on how, where and to whom the fund is paid out. For instance, you might instruct the fund to wait until your children are 18 until the fund pays out to them.

Having your policy written in trust is also faster to pay out, as there’s no need to wait until probate is granted before loved ones can receive the funds. With policies not written in trust, the probate process can take months in cases where people die without leaving a will.

As well as being faster, the process of having your policy written in trust can also be a lot more streamlined. The sheer number of IHT forms involved in a policy paying out in this way, along with the working hours and professionals needed to process them can make it a complex process.

Things to bear in mind

The majority of Life Insurance policies aren’t written in trust, in fact only about 6% are, so it’s something worth exploring early in the discussion if you think it might benefit you. If you already have Life Insurance with us and want to transfer it into trust, we have an online tool for putting your Life Insurance into trust on our site which you might find useful.

That being said, if writing Life Insurance in trust to avoid inheritance tax was automatically the best choice, that 6% would be much higher. There are factors to bear in mind before making an informed decision.

For example, while you may dodge the minefield that is navigating IHT, trusts are still complicated legal entities and come with their own jargon and concepts to get your head around.

Also, once a policy is written or transferred into trust, you (‘the settlor’) do not retain control. Yes, you can dictate the terms of the trust, such as who is paid what amount under what conditions. But once transferred to the trustees (normally the policyholder is automatically a trustee), it’s very unlikely that these terms can be changed and almost certain that the process cannot be cancelled. A policyholder should always read through the particular trust they are using.

With that in mind, it’s important to get the right advice (both on taxes and law) and ensure the terms of your trust are clearly defined and provide the best possible protection for your loved ones once the time comes for the trust to pay out to its beneficiaries.

Benefits of Beagle Street*

Trust Tool
FREE tool to place your policy in Trust.

Terminal Illness Cover
Terminal Illness cover included as standard.

Accidental Death Benefit
if you don’t get an immediate decision on your policy.

Online Account
Online access to your account, so your policy documents are never lost.

Search Official Records
We search official records to proactively pay-out.

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At Beagle Street, we focus on working with real, individual people to help them protect their nearest and dearest with the right cover that gives as much financial protection from the unknown as possible. Let us help you take the first steps on that journey today.

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