It can sometimes be difficult for advisers to quantify their value to clients but research from NFU Mutual has made it abundantly clear in one particular area.
“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%,” said Sean McCann, chartered financial planner at NFU Mutual.
The insurer found that more than 6,000 estates overpaid inheritance tax (IHT) in the 2018-19 financial year.
This is because, of the 22,100 that owed IHT, more than a quarter (6,040) included life insurance policies as part of the estate.
Collectively, the policies were worth £709m ($978m, €825m), meaning more than £280m in IHT could have been saved had the policies been written into a trust, NFU explained.
Quicker pay out
McCann said the process “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.
“However, if you are seriously ill when you put the policy in trust and die within seven years, HMRC could argue that the policy had a value when you put it into trust and seek to include that value in your estate and charge inheritance tax.
“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.”
In the 2018-19 figures, 82% of the estates liable for IHT included UK resident property for a total of £9.73bn.
Nearly all of the estates (99.5%) included cash, at around £4.86bn, and 86% had stocks and shares valued at a total of £8.25bn.
McCann added: “Inheritance tax is currently feared by many but paid by few. The chancellor has frozen the tax-free allowances for the next five years, meaning more and more families will be caught in the net.
“This makes it all the more important that families don’t pay inheritance tax on life insurance policies unnecessarily.”
IHT receipts have been growing steadily as well, NFU found.
In the second quarter of 2021 (April to July) alone, HM Revenue & Customs collected £2.1bn – a £500m increase from Q2 2020.