Inheritance Tax warning: Thousands of families overpaying on IHT bill


The latest HMRC figures estimate that more than 6,000 estates in the UK paid IHT on life insurance policies. Overall, around 22,100 estates paid Inheritance Tax in the 2018/19 tax year, which means around a quarter of them included life insurance policies. It is believed that many Britons escaped paying the majority of their IHT bill by using measures to legally avoid paying the tax, such as placing money in trust funds.

However, if life insurance policies were written into said funds, they would normally not be included as part of the deceased family member’s estate.

As a result of this, life insurance policies would not be liable for Inheritance Tax payments from the estate.


Sean McCann, a Chartered Financial Planner at NFU Mutual, outlined the importance of Britons becoming informed of the consequences certain actions can have on their IHT bill.

Mr McCann said: “Many people buy life insurance without advice, so aren’t aware that if they don’t put the policy in trust it’s included in their estate and could end up being taxed at 40 percent.

READ MORE:Rishi Sunak warned many avoiding capital gains tax and inheritance tax


“Putting life insurance policies into trust is relatively straightforward.

“If you have life insurance and it isn’t in trust, phone your provider and ask for a trust form.

“Provided you’re in good health when you put it into trust, there are normally no Inheritance Tax implications, as in most cases the policy has no value.


“However, if you are seriously ill when you put the policy in trust and die within seven years, HMRC could argue that the policy had a value when you put it into trust and seek to include that value in your estate and charge Inheritance Tax.


“Using a trust can also mean a speedier pay out in the event of a claim, as the family won’t need to wait for probate, which can make a huge difference to dependants relying on the money to cover day to day bills.”


Between April and July in 2020, the Government collected around £2.1billion in Inheritance Tax from the estates of those who had recently passed away, according to Government figures.

This represents a £500million increase from the same period the year before, which coincides with Chancellor Rishi Sunak implementing a freeze on tax-free allowances over the next few years.

According to Mr McCann, more and more families are going to have to pay a hefty Inheritance Tax bill due to Government mandates like this.


“Inheritance Tax is currently feared by many but paid by few,” he explained.

“The Chancellor has frozen the tax-free allowances for the next five years, meaning more and more families will be caught in the net.

“This makes it all the more important that families don’t pay Inheritance Tax on life insurance policies unnecessarily.”


What is IHT paid on?

Aside from life insurance policies, Inheritance Tax is commonly levied on the entire estate of someone who had died, which included their property, possessions and money.

IHT is not paid if the estate is valued below the £325,000 threshold or if everything above the this amount is left to the person’s spouse, civil partner or a charitable organisation.

In the 2018/19 tax year, 82 percent of the estates paid Inheritance Tax on a UK resident property, which was valued at a total of £9.73billion.


Over the same period, 99.5 percent of estates paid IHT on cash, which came to around £4.86billion.

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