Home > Inheritance Tax > Insurance Policies and IHT Bills

Insurance Policies and IHT Bills

By: J.A.J Aaronson - Updated: 11 Dec 2012 | comments*Discuss
 
Inheritance Tax Iht Insurance Policy Use

Planning to mitigate your Inheritance Tax liabilities can be one of the most difficult pieces of financial and legal manoeuvring that you will have to go through during the course of your life. Inheritance Tax or IHT, is one of the most loathed duties levied in the UK, and many people go to extreme lengths to try to avoid it. It should come as no surprise, then, to hear that the government has recently put in place new measures to make IHT avoidance more difficult.

These measures have targeted those who use trusts to attempt to mitigate their IHT bills. This had a serious effect on the insurance industry, who offer policies that will cover IHT on the policy holder’s death. After considerable pressure from the insurance industry the rules were relaxed, but they have still made the use of insurance policies to pay IHT more complex.

Whole of Life Policies

Under the new rules, using an insurance policy to pay your Inheritance Tax bill is still possible. This is generally achieved through what is known as a ’whole of life’ policy. This means that, in exchange for the payment of periodic premiums from the policy holder, the insurance company promises to pay out a sum that is guaranteed to cover the Inheritance Tax bill that is accrued on death. However, this type of policy relies on one important principle: they must be written in trust.

If the insurance policy in question was simply to make the payment into the policy holder’s estate, it would in itself raise the IHT liabilities of the deceased and therefore increase, rather than lower, both the bill and the beneficiaries’ ability to pay. In order to avoid this, insurance policies of this type are therefore written in trust. This means that the payment is not considered part of the deceased policy holder’s estate, and is therefore not subject to Inheritance Tax.

Trust Types

The type of trust that you use, however, is another important consideration. There are two main types of trust that are used in this situation – the ‘bare’ trust and the ‘interest-in-possession’ trust. The bare trust is the simplest to understand and implement. Essentially, under this agreement the insurance company will make a payment equal to the Inheritance Tax bill, and this payment will be made directly to the policy holder’s children. It is then their responsibility to settle the bill either with HM Revenue and Customs, or with any other beneficiaries who have already paid duties.

The interest-in-possession trust is more complex, but can be more efficient in some circumstances. Again, the insurance company guarantees to match the IHT bill, but in this case control over the money is conferred on a trustee (or several trustees). It is their responsibility to divide the money between all those who have had to make payments, as they see fit.

The major drawback associated with this agreement, however, is that the new government rules have placed a 6% flat tax on any such insurance pay-outs. While this is certainly less cumbersome than the 40% IHT that would otherwise be levied, if you want to avoid this duty you will need to use a bare trust.

The Downsides

Using an insurance policy to pay off an IHT bill is not for everyone. In the first instance, it should be noted that these policies tend to be expensive, and many people find that their premiums become unaffordable, particularly if their estate grows. On the other hand, if the value of your estate falls to below the IHT threshold (for example, if you downsized your house), then the insurance company will make no payment and you will essentially have lost your premiums. For all these reasons, it is absolutely vital to talk to an IHT specialist before making any decisions on this or related matters.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Why not be the first to leave a comment for discussion, ask for advice or share your story...

If you'd like to ask a question one of our experts (workload permitting) or a helpful reader hopefully can help you... We also love comments and interesting stories

Title:
(never shown)
Firstname:
(never shown)
Surname:
(never shown)
Email:
(never shown)
Nickname:
(shown)
Comment:
Validate:
Enter word:
Latest Comments
  • Fire
    Re: How Will My Second Job Be Taxed?
    Hi I work part time 22.5 hrs week and earn £17,500 year. I have just been offered extra work of 3 - 6 hours a month earning…
    13 February 2019
  • Alexam
    Re: How Will My Second Job Be Taxed?
    Hi, I have just gone part time with my previously full time job and am working less than 20hours in this job earning…
    5 February 2019
  • shelle
    Re: How Will My Second Job Be Taxed?
    i currently work 10 hors in supermarket been offered a job at care home 30 hours a week how / what will happen to tax how…
    23 January 2019
  • Wild child
    Re: How Will My Second Job Be Taxed?
    Hi I have a full time job and get 16,500 a year but thinking of getting a second job that I get 5,280 a month how much tax…
    21 January 2019
  • Cheryl Hayman
    Re: What is My Tax Code?
    Las6y week my tax code was 118L it's been this week to 36T only work 16 hours have no other job why
    21 January 2019
  • Rindass
    Re: How Will My Second Job Be Taxed?
    Hello from 28 of January i start full time job 48 hour per week. £446 per week. And i want star part time second job 16 hours…
    19 January 2019
  • Amy
    Re: Is it Worth Taking A Part-Time Job on A Pension?
    Hi I have a full time job and earn £18,999 per year I am looking to take on a part time bar job for 10…
    16 January 2019
  • Aram
    Re: How Will My Second Job Be Taxed?
    Hi i have a full time job i get 27400 per annual year before tax and if get the scond job as taxi driver earn nothing for…
    16 January 2019
  • Oofus18
    Re: Should I be Paid Mileage Allowance?
    My employer pays me 25p per mile but my expenses are fully reimbursable to the client I am currently working for. They…
    15 January 2019
  • rupert
    Re: Claiming Tax Relief on Mileage
    Hi, I use my personal car for visiting clients around the country, the company pays be back the fuel I have put in the car for…
    13 January 2019