In a recent survey, we found that as many as 6 out of 10 life & critical illness polices were not protected against the possible inheritance tax charge (written in trust), which would mean 40% of the payout above the threshold would be paid in tax.
This is particularly concerning as the uptake of life & critical illness policies has been increasing, especially with the rise in tax efficient policies now available where you can put the policy premiums through a Limited Company as an allowable business expense.
Let’s look at an example where an individual takes up a Life & Critical Illness policy and the implications of not putting it in Trust;
John, a father of two who lives with his partner and their children, takes out a policy for £450,000, on the understanding it will clear his entire mortgage of £400,000 in the event of death and leave an extra £50,000 to his partner and children.
Unfortunately, John passes away. The life insurance policy pays out £450,000 into his estate. Before probate is granted, any assets over the personal allowance of £325,000 are subject to Inheritance Tax.
The two example calculations show just how vital it is to write Life & Critical Illness cover into a trust.
|Estate is worth||£650,000|
|Inheritance tax bill @ 40%||£130,000|
With this scenario, there would be insufficient funds to pay the inheritance tax bill without (if there was no other option to raise the shortfall) having to sell the house to release the equity from it.
|Estate is worth||£200,000|
|Inheritance tax bill @ 40%||£0|
By writing the life policy in trust there would be no Inheritance tax liability, with the children & partner continuing to live in the house without the need to release any equity from it.
Simply writing a life insurance policy in trust will avoid the lump sum being added to the deceased estate.
The benefits of writing a policy in Trust;
For those of you who don’t know, Contractors can now pay for their Life & Critical Illness Insurance through their Limited company via a Relevant Critical Illness & Life Plan. It is classed as an allowable business expense, can be up to 50% cheaper than paying for the premiums personally, is not a benefit-in-kind or a P11D benefit and the company can also claim Corporation Tax Relief on the premiums. With all policies taken through us, we will setup your Trust free of charge.
So, whether you have an existing policy and not sure if it’s in trust, you are already paying for life & critical illness insurance out of taxed income, you have a Relevant Life plan without critical illness or you have not yet got around to putting vital life insurance in place, a Relevant Critical Illness & Life Policy, written in trust could be the most tax-efficient solution.
For more information, contact C&D: Business Protection Specialists on 0330 043 4321 (local rate) or request your free impartial quote here.
You will also be able to see how much you could save compared to a conventional plan on the link above.
This article is provided by C&D: Business Protection Specialists.