More than 6,000 estates have paid inheritance tax (IHT) on life insurance policies which could have been excluded if their policy was written into a trust, according to HMRC data.

Of the 22,100 estates that paid inheritance tax in 2018/19, HMRC figures show that more than a quarter of them (6,040) included life insurance policies.

These policies were worth a total £709m, meaning that more than £280m of IHT may have paid out on them. However, if the policies were written into a trust, they would not normally form part of the deceased’s estate and would therefore not be liable for IHT.

NFU Mutual chartered financial planner, Sean McCann, suggested that many people buy life insurance without advice, and are therefore unaware that if they don’t put the policy in a trust it is included in their estate – which could end up being taxed at 40%.

“Putting life insurance policies into trust is relatively straightforward,” McCann said. “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 IHT 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.”     

According to HMRC’s figures, the government collected £2.1bn of IHT between April and July this year, which is £500m more than the same period last year.

McCann added that IHT is currently “feared by many but paid by few”.

“The Chancellor has frozen the tax-free allowances for the next five years, meaning more and more families will be caught in the net,” he said. “This makes it all the more important that families don’t pay IHT on life insurance policies unnecessarily.”

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