PLACING LIFE INSURANCE POLICIES IN TRUST TO AVOID INCOME TAX AND INHERITANCE TAX

These are almost essential and can be used by single people, siblings living together and co-habiting couples as well as married couples and civil partners. They can also be much more flexible than a discretionary Trust.

If you have a life insurance policy, not held in trust, or with no beneficiary nominated, when you die this will be added to your estate. As a result, if your assets are worth more than £325,000 up to 40% of the value of the policy could go straight to the Inland Revenue on your death. However, if you place the policy in trust, the funds can be held outside your estate and can be available free of IHT to anyone you dictate. Furthermore, if you list your spouse, children and grandchildren as potential beneficiaries, the funds are available to each generation in turn and will not be chargeable to IHT as the trusteeship passes on to the next generation.

HOW A TRUST FOR YOUR LIFE POLICY CAN SAVE INCOME TAX

As with Discretionary Will trusts, all income tax payable on the capital can be re-claimed by non-tax payers such as your children. As a result, savings of up to £2,000 pa income tax can be achieved for each £100,000 of life insurance you leave in trust. (Assumes 5% pa interest). So if you have a £100,000 life insurance policy, you could reduce the IHT by £40,000 and save your widow or widower £20,000 income tax over the next ten years.

HOW A TRUST FOR YOUR MORTGAGE PROTECTION INSURANCE CAN SAVE YOU INHERITANCE TAX

If you have a mortgage protected by life insurance, making the life policy subject to a trust means that the mortgage can be re-paid by way of a loan to your partner, friend, sibling etc. So on their death, the ‘bit of equity’ in the house that was re-paid by the policy can go back into the trust as re-payment of the loan and be free of IHT to the next generation in addition to your joint £600,000 or single £300,000 allowance whether you are married or not.

Life insurance policies should be set up on a single life basis and in trust from outset for various reasons relating to the tax rules. Two single policies may not be as expensive as you would imagine as a joint policy can cost almost double that of a single policy, depending on age and health.

If you have accumulated a series of policies over the years, you may even save money on the premiums if you review these, as life insurance costs have dropped over the last 10 years. Depending on the work involved, it may even be possible to have the costs of arranging a new will for you and your partner and provision of other tax-saving trusts from the commission paid by the insurer. So re-arranging your insurance could reduce your monthly premiums, reduce your IHT bill, protect your assets, save your family income tax....and cost you nothing to arrange!

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