Why you must ‘reflect’ on life insurance to fund IHT bill

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The Inheritance Tax issue was raised on the Money to the Masses podcast, where Harvey Kambo said: “For people that are reaching the later stages of life, IHT becomes a topic of interest to them. In situations where your estate could be liable for Inheritance Tax, some people will choose to put in place life insurance and put that in a trust so that it’s available to their beneficiaries and can fund the tax that would be payable upon their death.”

Aside from life insurance policies, Inheritance Tax is commonly levied on the entire estate of someone who had died, which included their property, possessions, and money.

The standard Inheritance Tax rate is 40 percent.

It’s only charged on the part of your estate that’s above £325,000.

It’s important for Britons to understand the value of planning for retirement and thinking about other options to share their wealth.

Ms Kambo continued: “Now there are a number of reasons why you should reflect on life insurance that you’ve put in place for IHT.

“It could be that your estate has changed in value so the IHT applicable to your estate has changed. That needs to be reviewed.

“But you may have also made some gifts during your lifetime which become potentially exempt from tax and are only liable for tax for period of time.

“And obviously life insurance in not the only way to address your Inheritance Tax liability that may be applicable to your estate.

Carefully planned lifetime gifting can be a useful tool to reduce Inheritance Tax (IHT) after retirement.

Taxpayers are able to give away upwards of £3,000 every tax year to their family and loved ones without them being added to the value of their estate.

The reality is that by giving a financial gift earlier you could help loved ones.

They are then able to buy a home, fund their education, pay for their wedding or help ensure their financial security.

If the person gifts some of their estate early, the overall asset value in the estate is reduced.

This can either take it under the £325,000 threshold or, at least, reduce the amount of IHT that needs to be paid.

No Inheritance Tax is paid on gifts between spouses and civil partners, provided they live in the UK.

Sean McCann, a Chartered Financial Planner at NFU Mutual, outlined the importance of Britons becoming informed of the consequences certain actions can have on their IHT bill.

He 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 percent. 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.

“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.”

Furthermore, taxpayers can also give away wedding or civil ceremony gifts of up to £1,000 as part of the exemption. Everyday gifts, such as birthday or Christmas presents, are also eligible to be part of the exemption. However, taxpayers must be able to maintain a certain standard of living after making the gift.

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