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Families pay millions in unnecessary inheritance tax

Joanna Faith
Written By:
Joanna Faith

Thousands of families are shelling out millions of pounds in unnecessary inheritance tax from life insurance policies, analysis shows.

Taking out a life insurance policy and putting it within a trust means it falls outside of a deceased person’s estate so would be exempt from inheritance tax.

However, government figures suggest many policyholders aren’t aware of these rules.

According to HM Revenue and Customs (HMRC) 6,040 of the 22,100 estates that paid inheritance tax in 2018/19 included life insurance policies worth a total of £709m.

This means more than £280m of inheritance tax may have paid out on them, NFU Mutual said.

If the policies had been written into trust, they would not form part of the deceased’s estate and would therefore not be liable for inheritance tax.

Sean McCann, chartered financial planner at NFU Mutual, said: “Many people buy life insurance without advice, so aren’t aware that if they don’t put the policy in trust it’s included in their estate and could end up being taxed at 40 per cent.

“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.”

The government collected £2.1bn of inheritance tax between April and July this year, which is £500m more than the same period last year.