“Death and taxes. What an odd pairing”

This classic line delivered by Brad Pitt in the film Meet Joe Black may have a real resonance according to recent reports.

Following HMRC’s publication earlier this year, of the Inheritance Tax “IHT” statistics for 2018/19, it is reported that £280 million of IHT was paid to HMRC that related to insurance policies. IHT on insurance policy lump sums, can easily and legitimately be avoided, thereby separating the odd pairing pertinently observed by Joe Black.

Life insurance policies usually pay a lump sum on the death of the policy holder and a simple step to avoid the inheritance tax trap appears to have been missed by many policyholders.

If, like Anthony Hopkins in the film, a policyholder should unfortunately meet Joe Black (aka death) whilst paying premiums for a fixed period, the lump sum paid by the insurance company will become a chargeable asset for IHT purposes in their estate. The lump sum receipt could then be subject to IHT and reduced by 40% at current IHT rates.

A simple step of ensuring that the policy is written into trust will avoid the loss of 40% to IHT. The lump sum receipt is then treated as an asset of the trustees as opposed to the deceased’s estate and is not subject to IHT.

A further cash flow benefit arises because the lump sum can be paid directly to the beneficiaries as opposed to waiting for probate to be granted.

We would advise any policyholder to confirm the position with their life insurance company or contact the Dafferns Wealth team who can offer advice and assistance.