Thousands of farming families risk paying thousands in unnecessary inheritance tax by not putting their life insurance policies into trust, NFU Mutual has warned.
Nearly 7,500 families have paid inheritance tax on life insurance policies that could have been excluded from the tax if placed into a trust, HMRC figures show.
In 2022-2023, of the 31,500 estates liable for inheritance tax, 7,458 included life insurance policies.
These policies were valued at a combined total of £865m, potentially leading to up to £346m being paid unnecessarily in inheritance tax.
If life insurance policies are written into trust, they usually do not form part of the deceased’s estate and so are not subject to inheritance tax.
Sean McCann, chartered financial planner at NFU Mutual, explained that “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%.”
He added that placing life insurance policies into trust is a simple process. “If you have life insurance and it isn’t in trust, phone your provider and ask for a trust form.”
Mr McCann also noted that “provided you’re in good health when you put it into trust, there are normally no inheritance tax implications, as in most cases the policy has no value.”
However, he cautioned that “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.”
He highlighted another benefit, saying: “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 huge difference to dependants relying on the money to cover day to day bills.”
Inheritance tax receipts have been rising, with HMRC collecting £6.7 billion in 2022/23 — a 12% increase on the previous year.
Mr McCann added: “The tax-free allowances are frozen until 2030, meaning a growing number of families will be caught in the net.
“This makes it all the more important that families don’t pay inheritance tax on life insurance policies unnecessarily.”
