Nearly 7,000 estates have paid inheritance tax (IHT) including life insurance policies that could have been excluded from the tax if put into trust.

NFU Mutual analysed HM Revenue and Customs (HMRC) data and found that of the 27,800 estates that paid IHT in 2021/22, nearly a quarter (6,180) included life insurance policies.

These policies totalled £819m, meaning that up to £327m of IHT may have been paid on them.

The mutual said that if these policies were written into trust, they would not normally form part of the deceased’s estate and therefore would not have been liable for IHT.

Chartered financial planner at NFU Mutual, Sean 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%.

"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."

In the 2022/23 tax year, HMRC collected £7.1bn in IHT, an increase of £2bn in three years.

The Office for Budget Responsibility has predicted that these receipts will continue to rise and forecasts that the tax take will reach £9.7bn by 2028/29.

McCann added: "The tax-free allowances are frozen until 2028, meaning more and more families will be caught in the net.

"This makes it all the more important that families don’t pay IHT on life insurance policies unnecessarily."

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