How Life insurance can help you mitigate UK inheritance tax

UK inheritance tax is a tax on a UK domiciled individual’s estate on death and on certain gifts made during their lifetime. UK inheritance tax is charged at 40% of the value of your estate, which exceeds the nil rate band of £325,000.

For example; Tony’s estate is worth £1,000,000, this includes his properties, cash, collectibles etc. If Tony died, then the beneficiaries of his estate would have to pay the UK government £270,000 in UK inheritance tax (£1,000,000 - £325,000 = £675,000 @ 40%). They may have to sell part of his estate to afford this tax bill.

One way of protecting your beneficiaries from this inheritance tax is to take out a life insurance policy while you are alive. You should first estimate how much your UK inheritance tax bill will be by adding up the value of your entire estate and any estimated future additions to your estate, taking away your available nil rate band of £325,000 and calculating 40% of the remaining value.

If you do not use a trust, the insurance payout would go into your estate, increasing the value of your estate therefore increasing the inheritance tax bill.

Therefore having a Trust is essential in removing the insurance payout from your estate and ensuring the beneficiaries of the insurance plan receive the full proceeds.

This means when you die, the insurance policy would pay out to the Trust. You can decide who the trust pays this out to. The beneficiaries can then use this money to pay your UK inheritance tax bill. This would mean your family would not need to sell any of your assets if they do not want to, which may also include the family home. 

Always seek advice from a UK qualified lawyer or tax expert for advice on your own specific situation.