Using life insurance to mitigate Inheritance Tax

In recent research from Barclays Wealth, three in five (60 per cent) UK adults aged between 45 and 54 said they did not know if their investments would be subject to inheritance tax when they were passed on to family.

Additionally, the survey found that a quarter (26 per cent) of respondents did not know if their property’s value would be considered separately to the rest of their financial assets for inheritance tax purposes.

When it comes to expats, I have found that there is even more uncertainty around inheritance tax.

This is often due to confusion around the difference between residence and domicile.

Another factor is the potential added complexity of having a spouse that is not UK domiciled.

In my opinion, Inheritance Tax is one of the most overlooked and misunderstood areas of financial planning. Yet it can create colossal problems for those that inherit the assets.

However, IHT is also in effect a ‘voluntary’ tax. There are many established ways to mitigate the eventual charge on one’s estate upon death.

Mitigating Inheritance Tax

One of my favourites is to take out a life insurance policy that is written in an appropriate trust. The policy provides a lump sum on death to be used to pay the resulting IHT bill.

Note, that this does not reduce the amount of IHT that will be payable. It simply provides a means of paying the IHT from the proceeds of the insurance.

Due to the policy being in trust, the lump sum paid out will not count towards the estate.

The same technique can also be used when making large financial gifts. In this case, the proceeds of the life insurance policy would cover the IHT that would be due if the person making the gift were to die within seven years of making it.

A final, often overlooked, benefit is that the trust can pay out the proceeds of the policy quickly and this is not dependent on a grant of probate. In fact, if used to settle the IHT then it will actually enable such a grant to be obtained.

Therefore, not only is it tax effective, but it can speed up the process to dissolve the estate as per the wishes of the deceased.

Further Reading

Tax Guide for UK Expats (Tax Year 2021/2022)


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By Ross Naylor

Ross has been a financial adviser for the past 26 years. He uses the experience that he has gained over this time to help busy expats to understand their options, make smart decisions and avoid costly mistakes.