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Life insurance and inheritance tax

Written by Gemma Bellamy

Inheritance tax can be a complex subject, with lots of rules to get your head around.

It’s important that you understand how inheritance tax could affect a life insurance payout to your loved ones.

Find out more about what inheritance tax is, whether a life insurance payout is taxable and whether it’s worth putting your life insurance policy in trust.

What is inheritance tax (IHT)?

Inheritance tax is the tax that’s charged on your estate (this includes property, money and possessions) when you die.

The tax is currently charged at 40% on any part of the estate worth above £325,000 (the threshold).

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold can increase to £500,000.

Inheritance tax relief and exemptions

Inheritance tax doesn’t need to be paid if the estate:

  • is valued at less than the threshold
  • is left to a husband, wife or civil partner
  • is left to certain charities or community sports clubs.

If someone leaves their home to their children or grandchildren when they die, the threshold goes up to £500,000.

Married couples and people in civil partnerships can also combine their £325,000 thresholds to make it £650,000. Or £1,000,000 if both spouses or civil partners leave their share of their home to their children or grandchildren when they die.

There are other reliefs and exemptions, depending on your circumstances.

Do you pay inheritance tax on life insurance?

In some circumstances, a life insurance payout can count as part of your estate when you die. This may make the life insurance payout taxable, if this pushes your estate value over the threshold and any relief or exemptions don’t apply.

A way to guard against inheritance tax on this payout is to put your life insurance in trust.

Can life insurance go into a trust?

Yes. Putting your life insurance in trust can keep it out of your estate, which means inheritance tax doesn’t need to be paid. The trust is legally owned by the trustees and not considered part of your estate.

The life insurance will go into a trust, where you can name who you want to receive the payout (the beneficiaries).

You can also name trustees (who could be members of your family or a legal professional). They'll be responsible for issuing the payout to the beneficiaries if you pass away.

Benefits of writing your life insurance in trust:

  • You can guard against a potential tax bill if the value of your estate is above the threshold (subject to relief and exemptions).
  • You can set guidance on how, where and to who the fund is paid out. For example, you might want to instruct the fund to only pay out once your children are 18.
  • The payout may be faster, as there’s no need to wait until probate is granted before your loved ones can receive the money.
  • You don’t have to worry about filling out the many Inheritance Tax forms.

Things to be aware of:

  • While you may guard against paying inheritance tax if you write your life insurance in trust, trusts are still complicated legal entities. So it’s important to understand how they work.
  • There are legal and tax consequences involved with setting up a trust.
  • Once a life insurance policy is written in trust, you can’t simply change your mind and cancel it, but you can make changes with the consent of the trustees.

It’s important to get the right financial and legal advice before putting your life insurance in trust.

You should also make sure the terms of your trust are clear, and that they provide the best possible protection to the beneficiaries once the trust pays out.

How to put life insurance into trust

If you already have a single life insurance policy with Beagle Street and want to transfer it into trust, we have a trust form available for putting your life insurance into trust which you might find useful.

 

Why choose Beagle Street for your life insurance?

We’re a dedicated life insurance provider that cares about protecting you and your loved ones.

With terminal illness cover included in all our life insurance policies as standard, and critical illness cover and children’s critical illness cover available as simple add-ons, we’re also flexible and able to meet individual needs.

What’s more, we’re committed to sticking to the premiums we offer when you take out your policy, which means the amount you pay each month will never go up, even if there are changes to your health (unless you request changes to your policy).

We’ll guide you through the application process, so you can have confidence that your family will be protected.

Don’t just take our word for it - we’re proud that our customers have rated us ‘Excellent’ on Trustpilot!

Ready to find out why? Our simple quick quote tool will let you know how much cover you can get, and how much it’s likely to cost you. There’s no commitment to take out a policy.

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