Policy in Trust Unlock UK Inheritance Tax Savings
Are you concerned about Inheritance Tax reducing your loved ones inheritance Explore how placing your life insurance policy in trust can help you avoid IHT, speed up payouts, and make informed financial decisions for your UK estate
Taking out a life insurance policy is a sensible step to protect your family's financial future. But many people don't realise that without the right planning, a significant chunk of that payout could be lost to Inheritance Tax (IHT).
Fortunately, there's a simple, effective, and often free solution: placing your policy in trust. This article will guide you through what a trust is, its powerful benefits, and how you can use it to ensure your loved ones receive the maximum possible amount, exactly as you intended.
What is a Trust and Why Use One for Life Insurance?
Think of a trust as a legal 'safety deposit box' for your life insurance policy. When you put your policy in a trust, you are legally separating it from the rest of your assets (your 'estate').
There are three key roles in a trust:
- The Settlor: This is you, the person who sets up the trust and puts the policy into it.
- The Trustees: These are the people you appoint to manage the trust. They are legally responsible for looking after the policy and ensuring the payout goes to the right people when the time comes. You can choose family members, friends, or a professional like a solicitor.
- The Beneficiaries: These are the people you want to receive the money from the payout, for example, your children, partner, or other relatives.
By placing your policy in trust, the payout is made directly to the trustees for the benefit of your beneficiaries. It never legally becomes part of your estate. This simple act has two enormous advantages: avoiding IHT and speeding up the payout.
The Biggest Benefit: Avoiding Inheritance Tax (IHT)
Inheritance Tax is a tax on the estate of someone who has died. In the UK, if the total value of your estate (your property, money, and possessions) is above a certain threshold, currently £325,000, it could be taxed at 40%.
If your life insurance policy is not in a trust, the payout amount is added to the value of your estate. This can easily push an estate over the IHT threshold, or increase the amount of tax that needs to be paid. This means up to 40% of the money you intended for your family could go to HMRC instead.
By putting the policy in trust, the payout is excluded from your estate for IHT calculations. The full amount goes to your loved ones, tax-free.
To see just how much this could save your family, use our straightforward Policy in Trust Saver calculator. It provides a clear estimate of the potential IHT liability on your life insurance payout.
Worked Example: The Power of a Trust
Let's look at Sarah's situation:
| Item | Value |
|---|---|
| Her Estate (property, savings etc.) | £400,000 |
| Her Life Insurance Payout | £200,000 |
| IHT Threshold (Nil-Rate Band) | £325,000 |
Scenario 1: Policy NOT in Trust
- The £200,000 payout is added to Sarah's estate.
- Total Estate Value: £400,000 + £200,000 = £600,000
- The portion of the estate liable for IHT is: £600,000 - £325,000 = £275,000
- IHT payable at 40%: 40% of £275,000 = £110,000
The life insurance policy has directly caused an extra £80,000 in tax (40% of the £200,000 payout).
Scenario 2: Policy IS in Trust
- The £200,000 payout is separate from the estate and is paid directly to the beneficiaries, tax-free.
- Total Estate Value for IHT: £400,000
- The portion of the estate liable for IHT is: £400,000 - £325,000 = £75,000
- IHT payable at 40%: 40% of £75,000 = £30,000
By using a trust, Sarah's family saves £80,000 in Inheritance Tax.
How to Use the Policy in Trust Saver Calculator
Our Policy in Trust Saver is designed to give you a quick and clear picture of your potential savings.
Step-by-Step Guide:
- Life Insurance Payout Amount (£): Enter the total sum assured on your life insurance policy. This is the amount that will be paid out.
- Estimated Value of Your Estate (£): Enter the approximate value of all your other assets (property, investments, savings, valuable possessions) minus any debts. Do not include the life insurance payout here.
Your Results:
The calculator will instantly show you:
- Potential IHT on Payout: The amount of Inheritance Tax that could be due on your life insurance payout if it's not held in trust.
- Your Potential IHT Saving: This is the key figure! It's the amount of money your beneficiaries will keep, simply by using a trust.
More Than Just Tax Savings: Other Key Benefits
While avoiding IHT is a huge plus, trusts offer other valuable advantages:
- Faster Payouts: When a policy is in a trust, the trustees can claim the money as soon as they have the death certificate. They don't have to wait for probate (the legal process of sorting out the deceased's estate), which can take many months or even years. This means your family gets the financial support they need much more quickly.
- Greater Control: A trust allows you to specify exactly who your beneficiaries are. This is particularly useful for unmarried couples or complex family situations, ensuring the money goes to the right people. With a 'discretionary trust', you can give your trustees flexibility to make decisions based on the beneficiaries' circumstances at the time.
- Protection for Beneficiaries: You can protect the inheritance for beneficiaries who might be young, vulnerable, or not good with money. The trustees can manage the funds on their behalf, releasing money as and when it's needed for things like education or a house deposit.
Common Mistakes to Avoid
Putting a policy in trust is straightforward, but it's important to get it right. Avoid these common pitfalls:
- Delaying the Decision: The best time to put a policy in trust is when you first take it out. Most insurers provide the forms for free and it's a simple part of the application process.
- Choosing the Wrong Trustees: Appoint people you trust implicitly to act in the best interests of your beneficiaries. They should be responsible and likely to outlive you.
- Not Informing Your Trustees: Make sure your chosen trustees know they have been appointed and where the trust documents are kept.
- Forgetting to Review: Major life events like marriage, divorce, or having more children are prompts to review your trust and ensure it still reflects your wishes.
What to Do After You Get Your Result
The result from the Policy in Trust Saver is your starting point for action.
- Understand Your Savings: The figure shows the potential financial legacy you are securing for your family.
- Contact Your Provider: If you have an existing policy, contact your insurance provider and ask for their trust forms.
- Get Expert Guidance: This is where a specialist broker like WeCovr can be invaluable. We can help you navigate the process, ensure you understand the forms, and make sure your policy is structured correctly to meet your goals.
- Complete and Store: Fill out the trust deed, get it witnessed correctly, and send a copy to your insurer. Keep the original document in a safe place and give a copy to your trustees.
Your Policy, Your Health: Connecting Life Insurance and PMI
Placing your policy in trust is a vital part of managing your life insurance and securing your family's future. This proactive financial planning should go hand-in-hand with looking after your own health.
That's where Private Medical Insurance (PMI) comes in. While life insurance protects your family after you're gone, PMI helps you access prompt diagnosis and high-quality private treatment while you are living. It can reduce waiting times for specialist appointments and surgery, giving you peace of mind about your health.
It's important to understand that in the UK, Private Medical Insurance is designed to cover acute conditions that arise after your policy begins. It does not cover pre-existing conditions (illnesses you already had) or chronic conditions (long-term illnesses that require ongoing management, like diabetes or asthma).
At WeCovr, we believe in a holistic approach to protection. We can help you find the right life insurance and PMI policies for your needs. Better yet, customers who purchase life insurance or PMI through us can often access discounts on other types of cover, creating a comprehensive and cost-effective protection plan. As a thank you, our clients also receive complimentary access to CalorieHero, our AI-powered calorie and nutrition tracking app to support their health goals.
Frequently Asked Questions (FAQs)
1. Is it difficult or expensive to put a life insurance policy in trust? No. Most insurance providers offer standard trust forms for free when you take out a policy. The process is usually a matter of filling in a form and getting it witnessed.
2. Can I put an existing life insurance policy into a trust? Yes, in most cases you can. You'll need to contact your insurer and ask for their trust forms to complete. It's best to do this as soon as possible.
3. Who should I choose as my trustees? You should choose at least two people who are over 18, reliable, and that you trust completely to follow your wishes. They could be family members, close friends, or a professional like a solicitor.
4. What's the difference between an 'absolute' and a 'discretionary' trust? An 'absolute' trust has named, specific beneficiaries who cannot be changed. It's very simple. A 'discretionary' trust gives the trustees more flexibility to decide which beneficiaries from a chosen group receive money, how much, and when, based on their circumstances. This is often more flexible for changing family situations.
5. Do the trustees get to keep the money? No. Trustees have a legal duty to manage the trust fund for the benefit of the beneficiaries only. They cannot personally profit from their role.
Don't let a simple oversight reduce the inheritance you leave for your loved ones. Using a trust is one of the smartest and simplest moves you can make in your financial planning.
Take the first step now. Use the Policy in Trust Saver calculator to see your potential savings, then speak to the friendly experts at WeCovr. We can provide you with a no-obligation quote for life insurance and guide you through the process of putting it in trust, ensuring your family is fully protected.
