Almost one in four estates that paid inheritance tax in 2022/23 included life insurance policies, according to newly released figures from HMRC.
In total, 7,458 estates with life insurance were charged tax, despite many of these bills potentially being avoidable had the policies been written into trust.
The policies in question were worth a combined £865m, meaning as much as £346m may have been paid in inheritance tax unnecessarily.
Policies written into trust are generally not considered part of the deceased’s estate and therefore not subject to inheritance tax.
Sean McCann, chartered financial planner at NFU Mutual, 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.”
He added: “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.”
Inheritance tax receipts hit £6.7bn in 2022/23, a 12% rise from the previous year. McCann warned that the ongoing freeze on tax-free allowances until 2030 will only widen the net.
“The tax-free allowances are frozen until 2030, 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.”
HMRC’s data also showed that 84% of estates paying inheritance tax included UK residential property valued at £15.6bn, all estates included cash totalling £7.1bn, and 82% held stocks and shares worth £10.8bn.
