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Point of View

Is your life insurance policy written in trust? 

If not, then watch out for inheritance tax.

When people buy and arrange life insurance cover from an online provider, they may not realise the importance of making sure the policy is written in trust.

The insurance policy is often taken out with the best of intentions, typically to protect the financial security of children, but some policyholders have no idea that by not completing a trust form, their beneficiaries may have to pay inheritance tax charged at 40% on the money received.

A trust is a simple legal arrangement that allows you to gift your life insurance policy to someone else (the beneficiary). In the event of a claim being made, a policy which is written in trust will pay out the sum assured directly to your Trustees who in turn will distribute it in accordance with the terms of the trust – which could simply be to pass the proceeds to your beneficiaries. If the life insurance policy is not written in trust, then the money is added to your total estate and will be taken into account when inheritance tax is calculated.

For those who hold more than one property, or live in areas where house prices have significantly climbed in recent years, and assuming they are relatively debt-free, then it is highly likely that inheritance tax will have to be paid. Inheritance tax is payable when the value of a person’s estate exceeds a certain amount  when they  die, and so would include your house and any life insurance money paid out not written in trust. Everyone has an inheritance tax allowance, known as the nil rate band, which means that no inheritance tax is paid on any assets totalling up to £325,000.

But for people whose assets are above this threshold, or could be in the future, the value of their estate above the allowance will be taxed at 40%, and a life insurance policy which is written in trust will be beneficial.

We don’t expect to see any changes to the £325,000 allowance before 2020, but George Osborne did reveal in July 2015's Summer Budget that he was taking the family home out of inheritance tax for all but the wealthiest; introducing a new tax-free additional 'main residence' band which is being phased in starting at £100,000 in 2017 and increases to £175,000 in 2020. This however is only valid on a main residence and where the recipient of a home is a direct descendant, which means children, step-children and grandchildren.  However where your estate is worth more than £2,000,000 the extra allowance is not available.

There are different types of trust policies that you can put in place. Which one you choose will depend on your needs and circumstances. Discretionary trusts often provide lots of flexibility, so you can change who will benefit from the policy in the future. This means for a growing family, where more than one child or grandchild arrives, new family members are automatically added in. If you have a critical illness policy or terminal illness cover then a ‘split trust’ can be put in place to allow the policy holder to benefit, whilst any death benefit payment is passed onto the beneficiaries whilst remaining in the protective tax wrapper of the trust. These are just some of the trust options to consider.

Choosing a trustee for your life insurance policy is an important decision and should be carefully considered. The trustees you appoint become the legal owners of the policy. They inform the insurance company of your death, and they ensure the money paid is passed on to your beneficiaries. People often choose a family member or a friend, but others instruct a professional such as solicitor or accountant for this role. Typically, two trustees are selected and these people should have the beneficiary’s best interests at heart. The policy holder is also automatically made a trustee. You can change your selected trustees in the future if you wish.

Most life policies can be set up in trust. If you already have a life insurance policy, you can elect to place it in a trust thereby shielding the proceeds from any inheritance tax liability. Once a policy is written in trust it can’t be amended or cancelled without the Trustees permission and so it is important that you seek financial advice before making changes to your existing insurance arrangements. Speak to your financial adviser for help, or if you don’t have an appointed adviser, get in touch with us at letstalk@sanlam.co.uk, we'd be delighted to help.  

Please remember any views or facts expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice. None of the information should be regarded as advice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested. Any tax treatment is dependent upon individual client circumstances and may be subject to change.

Sanlam is a trading name of Sanlam Wealth Planning UK Limited (Reg. in England 3879955) and English Mutual Limited (Reg. in England 6685913). English Mutual Limited is an appointed representative of Sanlam Wealth Planning UK Limited which is authorised and regulated by the Financial Conduct Authority.

Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol, BS1 2NH.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.