Inheritance Tax (IHT) in the UK is applied at 40% on any portion of an estate exceeding the £325,000 threshold (as of current tax regulations). This threshold includes all assets, such as:
- Your
home
- Savings
and investments
- Valuable
possessions
- Life
insurance payouts (if not placed in trust)
If your estate exceeds the IHT threshold, the government can
claim 40% of the taxable amount. This means that a significant portion of your
life insurance payout could be lost to tax if it is not “Written in Trust.”
Example: If you have a life insurance policy worth £200,000
and your estate already exceeds the IHT threshold, £80,000 (40% of
£200,000) could be lost to tax, leaving your beneficiaries with only £120,000.
However, if your policy is “Written in Trust,” your beneficiaries receive the
full £200,000 without any tax deductions.
Why Legal Delays Can Be Costly
If your life insurance is not placed in trust, the payout
becomes part of your legal estate. This means it must go through probate, which
can take several months or even years to resolve. During this time:
- The
funds remain inaccessible to your family.
- Legal
fees and administrative costs accumulate.
- Your
solicitor may charge additional fees for handling the estate.
On the other hand, if your policy is placed in trust,
the insurance company pays out directly to your beneficiaries, bypassing
probate completely. This ensures that your loved ones receive the money quickly
and efficiently, when they need it the most.
How to Get Your Life Insurance “Written in Trust”
The good news is that setting up a trust for your life
insurance policy is incredibly simple and free! Most life insurance
brokers offer this service at no additional cost when you purchase a policy.
Here’s how you can do it:
- Choose
a Life Insurance Policy: Select a policy that meets your needs and
provides adequate financial support for your family.
- Request
a Trust Form: When purchasing the policy, ask the insurer or broker to
provide a trust form.
- Name
Your Beneficiaries: Specify who should receive the payout in case of
your passing. This could be your spouse, children, or any other intended
recipient.
- Appoint
Trustees: These are individuals who will manage the trust and ensure
that the funds are distributed according to your wishes. You can choose
family members or a legal representative.
- Sign
and Submit the Form: Complete the trust document and return it to your
insurer to finalize the arrangement.
Once completed, your life insurance policy will be
effectively “Written in Trust,” ensuring the benefits are safeguarded from
inheritance tax and probate delays.
Does This Apply Even If the Policy Is for Mortgage Protection?
Yes! Even if your life insurance policy is intended to pay
off your mortgage, writing it in trust still offers advantages. Instead of the
payout going into your estate and potentially being taxed, the funds can be
directed straight to your partner or family members. They can then use the
money to clear the mortgage without unnecessary tax deductions.
This simple strategy ensures that your mortgage is paid off
in full, rather than being reduced by inheritance tax liabilities.
Common Myths About Writing Life Insurance in Trust
Despite the clear benefits, some misconceptions prevent
people from taking this essential step. Let’s debunk a few common myths:
1. “It’s too complicated to set up a trust.”
- False!
Setting up a trust is straightforward and typically handled by your
insurer or broker at no extra cost.
2. “I’ll lose control of my policy if it’s in trust.”
- False!
You still own the policy, and you can name trustees to oversee the
distribution of funds. You can also modify the trust if needed.
3. “My estate isn’t big enough to worry about inheritance
tax.”
- Possibly
true, but remember, your property alone may push your estate over the £325,000
IHT threshold. It’s always best to plan ahead.
4. “Only wealthy individuals benefit from trusts.”
- False!
Anyone with life insurance can benefit from placing their policy in trust,
ensuring faster payouts and potential tax savings.
Final Thoughts: A Simple Yet Powerful Strategy
Life insurance is a crucial safety net for your loved ones,
but if structured incorrectly, it can lead to unnecessary taxation and legal
delays. By ensuring your policy is “Written in Trust,” you:
- Guarantee
a quick and direct payout to beneficiaries.
- Prevent
the payout from being taxed under inheritance tax laws.
- Avoid
long probate delays and solicitor fees.
- Protect
the full value of your policy for your family.
The best part? Setting up a trust is completely free
with most brokers and requires minimal effort on your part.
If you’re in the process of purchasing life insurance, make sure to ask your insurer about writing your policy in trust—it could save your family thousands of pounds and unnecessary stress during a difficult time.