Easily avoid a life insurance tax trap
Life insurance policies generally pay out a premium in the event of the policyholder’s death. However, recently published figures from HMRC suggest that many of them are falling into an easily-avoided tax trap. What’s going on?
-
Accounting for VAT if there is no cash payment
Your business has submitted repayment returns for the last two quarters and you are concerned that you might have underpaid output tax on some supplies where no money has changed hands. Are your concerns justified?
-
Treatment of distributions under review
The government has launched a consultation on modernising the tax treatment of distributions and repayments of capital by companies. The proposals could affect the distinction between dividends taxed as income and capital payments subject to CGT. What changes are being considered?
-
Tax relief on equipment you haven’t paid for (yet)
The timing of tax relief for purchases of equipment isn’t straightforward when payments are delayed or goods are purchased through hire purchase (HP) agreements. How can you use these rules to your advantage and get tax relief before you’ve paid the final invoice?
The idea behind a life insurance policy is simple - the individual agrees to pay premiums for a fixed period of time. If they die within that time, the insurance company will pay a lump sum. The tax trap occurs because the policyholder’s death means that the estate immediately holds a valuable asset, i.e. the amount of the lump sum, which is a chargeable asset for inheritance tax (IHT) purposes. HMRC’s recently published figures have been analysed by industry experts, and it is reported that £280 million of IHT paid in 2018/19 (the most recent year that detailed statistics are available for) related to insurance policies. But this charge is entirely avoidable.
To avoid the trap, the policyholder simply needs to ensure the policy is written into trust. This means that the asset belongs to the trustees, not to the death estate. The lump sum is not counted when working out the IHT due. As an added bonus, because the lump sum is not part of the estate, it can be paid out to the specified beneficiaries immediately, i.e. without needing to wait for probate to be granted. Part of the problem is that it is very easy to buy policies online, with no input from a qualified advisor. While there may be an option to write the policy into trust, the significance of choosing the option may not be clear to the buyer. Existing policy holders should contact their insurers to ask whether their policy is written into trust and, if not, ask to have this remedied immediately.
This website uses both its own and third-party cookies to analyze our services and navigation on our website in order to improve its contents (analytical purposes: measure visits and sources of web traffic). The legal basis is the consent of the user, except in the case of basic cookies, which are essential to navigate this website.