Thousands hit with avoidable IHT bills on life insurance

Farmers are being urged to check that any life insurance policies they hold have been put into trust to avoid an unnecessary inheritance tax bill.

According to new HM Revenue and Customs figures, almost 7,500 families paid inheritance tax on life insurance policies in 2022-23, but many would have escaped a bill if the policy was written into trust.

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These policies were worth a total of £865m, meaning up to £346m of inheritance tax may have been paid on them unnecessarily.

HMRC collected £6.7bn of inheritance tax in 2022-23 – a 12% increase on the previous year.

Put policies into trust

Sean McCann, chartered financial planner at NFU Mutual, the financial advisory firm, said:

“Many people buy life insurance without advice, so aren’t aware that if they don’t put the policy in trust it is included in their estate and could end up being taxed at 40%.

“Putting life insurance policies into trust is relatively straightforward. If you have life insurance and it isn’t in trust, phone your provider and ask for a trust form.”

There are normally no inheritance tax implications when putting a life insurance policy into trust, providing the holder is in good health.

“However, if you are seriously ill when you put the policy in trust and die within seven years, HMRC could argue that the policy had a value when you put it into trust and seek to include that value in your estate and charge inheritance tax,” Mr McCann added.

Using a trust can also mean a speedier pay out in the event of a claim, as the family won’t need to wait for probate, which can make a difference to dependants relying on the money to cover day-to-day bills.