Place life insurance policies 'under trust' to reduce IHT

by Daniel Jones

Brits can avoid tax by placing any life insurance policy they might have "under trust", it is claimed. For someone with a £100,000 policy, they could save as much as £40,000 by opting for this route instead of leaving the payout directly to beneficiaries.

New research from shows just how much this could add up. It claims Brits waste around £450 million a year by making unnecessary inheritance tax payments. But by careful tax planning when making a will, this can be drastically reduced.

Inheritance tax is Britain's fourth biggest area of tax waste, the company claims in its annual Tax Action report. It also says 85 per cent of Brits have done nothing to reduce the amount of inheritance tax their estate could be liable for in the last 12 months.

Currently, life insurance policies are usually free of personal liability, but the payout may in some circumstance be hit by inheritance tax. To avoid paying this, individuals who take out a policy can make a key decision before they sign on the dotted line.

They can leave the payout to beneficiaries directly, but this could reduce a £100,000 life insurance payout by as much as £40,000 if an individual's estate is worth more than £325,000, the current inheritance tax threshold.

Alternatively, they can put these policies under trust, thereby removing the asset from the estate and from inheritance tax liability.

"Ensuring your life insurance payout no longer forms part of the estate is one of the simplest and most effective ways of avoiding death tax wastage.  It also reduces the legal loop holes which beneficiaries are usually faced with thereby making it both quicker and easier to distribute the money to the right people, explains Karen Barrett, chief executive at

Another way of reducing inheritance tax is to leave money to charity. New rules mean that inheritance tax can be cut by a tenth for anyone who bequests ten per cent of their estate to a charitable cause or organisation.

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Published on: April 25, 2012

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