Currently, less than 10% of Legal & General customers are putting their life cover policies into trust, which means that over 90% of life policies could count towards IHT limits.
Under normal circumstances, the lump sum received from a life insurance policy will form part of a legal estate, and may therefore be subject to inheritance tax. The Inheritance Tax threshold in the UK for individuals is £325,000, and tax is payable at 40% on any part of an estate above this level. By writing a life insurance policy in trust, the proceeds from the policy can be paid directly to the trustees of the trust, who can then share this with the beneficiaries rather than to the deceased’s legal estate. This means the insurance money will therefore not be taken into account when inheritance tax is calculated and the value of the estate may remain below the threshold.
However, Legal & General customer data shows that only around 6-8% of its life policies are currently placed in trust, leaving policyholders at risk of exceeding the inheritance tax threshold. Research suggests that in 2014, £530 million was ‘lost’ to IHT by not placing life insurance policies in trust, a £58 million increase on 2013.
The risk may be particularly acute for unmarried couples. According to the ONS, 12% of the UK population (5.3m adults) are living together as unmarried couples which UK law does not recognise in the same way for tax purposes. For unmarried couples, assets such as the family home or protection policies can be counted towards your estate and push these couples over the inheritance tax threshold.
The warning comes as Legal & General launches its new online trust hub, designed to simplify and improve the understanding of the process of setting up a trust for its protection policy holders. The Legal & General online hub helps advisers to identify a suitable trust with their clients for their new or existing policy, and create a deed in just a few minutes for printing and signing.
Mark Holweger, Managing Director, Intermediated, Legal & General Insurance says:
“Putting life insurance policies in trust may be a good move in terms of financial planning for many customers – but it’s something that is done by surprisingly few people. As the number one term assurance and critical illness cover protection provider in the UK, we recognise the importance of giving advisers the tools to make their client’s aware of all the options available, allowing them to make an informed choice.
“Legal & General’s online trust hub is another way of keeping customers informed of all the options that are available to them. Given that currently just 6-8% of our protection policies are put into trust, there’s a real opportunity here for advisers to make a significant difference to their client’s IHT planning process."
