Couple cut £3m inheritance tax to ZERO – easy trick to cut your IHT bill too | Personal finance | Finance
Reducing your inheritance tax exposure is more important than ever, as Chancellor Rishi Sunak has frozen IHT thresholds for five years. This means rising stock and house prices will drag more unsuspecting families into the net.
Inheritance tax is a complicated subject, and without independent financial advice it is easy to make costly mistakes.
As an independent financial advisor himself, Tom Skinner knows the importance of IHT planning.
Tom, 39, co-founder of London-based Barnaby Cecil Financial Planning, also knows the importance of protecting his family should the worst happen.
He and his wife Jane have taken out life insurance policies worth £1.5million each, for their two young boys Charlie, 5, and Otto, 3. They are worth 3 million pounds in total.
However, Tom said this raises an issue that many ordinary people overlook.
If someone receives a life insurance payout, the payout will be added to the value of their other assets, including property, stocks, Isas, etc., when calculating the total value of their estate.
This could push many people unexpectedly beyond the zero rate threshold of the IHT, so that they incur the 40% death cost.
If this happens, it could mean that a large proportion of their total wealth will go directly to HM Revenue & Customs, rather than their loved ones.
According to Tom: “It can be very distressing for a family to learn that 40% of an insurance policy is lost due to money being paid directly to the estate.”
Even if your life insurance policy is worth less than £325,000, it could push you into the danger zone.
Tom said many don’t realize the danger because they will never have taken independent financial advice.
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One in four areas that are hit by an IHT bill each year include money from life insurance policies, according to HMRC figures, so this is a major problem.
In total, these families may have paid over £280million unnecessarily, in the 2018/19 tax year alone.
Given that approximately 22,000 estates pay inheritance tax each year, that means more than 6,000 families could be wasting money each year.
However, Tom said you can work around this problem by filling out a simple form. “If you write a life insurance policy in trust, it will not normally form part of your estate on death and therefore will not be subject to inheritance tax.”
Insurance companies usually send out a trust form when you buy a life insurance policy, but many people don’t fill it out.
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Tom said: “If you have life insurance and it’s not in trust, call your provider and ask for a trust form.”
Gifts and money paid into trust are exempt from IHT, provided you live for another seven years after making them.
So it pays to plan ahead while you’re relatively young and healthy, Tom said. “If you are seriously ill and die within seven years of the creation of the trust, its value can still be included in your estate and charged IHT.”
Putting life insurance in a trust also means your family shouldn’t have to wait for probate either, Tom added. “It speeds up payments and could help dependents who need money to cover day-to-day bills.”
According to insurer Aegon, only six percent of policies are underwritten in trust, so check your position now.
Tom Skinner’s family is protected from both death and taxes. This is yours?