Brits paying £448m over the odds in inheritance tax

Careful tax planning which puts life insurance under trust could save £448 million in unnecessary inheritance tax (IHT) payments, according to a new study.

Almost nine out of 10 Brits have taken no action in the last 12 months to reduce the amount of IHT for which their estate could be liable, Unbiased.co.uk’s annual Tax Action Report indicates.

Under current tax rules, life insurance policies are usually free of personal liability, however in certain circumstances the payout may be subject to IHT.

In order to avoid this, individuals taking out life protection specifically to provide for their heirs need to make an important decision before signing on the dotted line, Unbiased.co.uk said.

They can either decide to leave the payout to beneficiaries directly, or alternatively put these policies under trust, thereby removing the asset from the estate.

The former route 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 IHT threshold for individuals, the report claims.

Karen Barrett, chief executive at Unbiased.co.uk, said: “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 loopholes which beneficiaries are usually faced with, thereby making it both quicker and easier to distribute the money to the right people.”