Life insurance and inheritance tax – a quick guide

By Bob Atoo
September 30, 2014

According to the HMRC, inheritance tax is payable when someone dies and has assets valued at over £325,000 (2014 -15), there are exemptions of course, but any amount over the £325,000 is taxed at 40%.

The £325,000 can also include gifts made in the last seven years of that person’s life.

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Mitigating Paying Inheritance Tax

Many people who do not consider themselves wealthy will, when they add up the value of all their assets, find that they can easily exceed the threshold – often with the value of their home – and the tax on the excess will have to be paid. There are a limited number of gifts that you can make to reduce the value of your assets but these are limited in their scope and if they are exceeded, even though you no longer have that asset, it will be counted by HMRC as part of your taxable estate.

Many people find that their main asset is their house and the only way to pay the bill would be to sell the house. One option is to have a life insurance policy to cover the potential tax bill.

Types of Life Insurance

Whole of Life Policy

When the policy is set up it can be specified as being held in trust. When you die the policy pays out into the trust which then pays all or part of your inheritance tax. Many life companies will help with this but you can get advice if yours doesn’t. A whole of life policy as the name suggests, lasts for as long as you live. It pays out when you die, however long that may be. If you want this kind of insurance, the earlier you take it out the lower the premiums are likely to be.

The most popular whole of life policy is ‘Guaranteed premium’ where you pay a fixed monthly amount over the life of the policy and get a fixed pay-out.

Term Insurance Policy

Again the policy is held in trust. If you die within the term of the policy, it pays out to the trust. The trust can then pay the money to some or all of the inheritance tax bill. It is possible to convert some term policies to whole of life policies when they expire for an additional premium.

If you are looking for a life insurance policy that best suits your individual needs, visit our life insurance deals page now and get a quote.

More life insurance guides

Learn more about life insurance with our handy guides and resources below: