One unexpected consequence of rocketing house prices, particularly in the south and east of England, is the worry over inheritance tax bills for many families.
At the moment, an estate worth up to £325,000 for an individual – or £650,000 for a married couple – is tax-free. Above this threshold, your nearest and dearest are faced with a 40% tax bill on your death.
In the past year, house prices in the south-east have grown at an average rate of 9.4%. A typical property is now worth £408,000, meaning many have become liable for inheritance tax on the basis of their home’s value alone. Of course, an estate encompasses more than your property – savings, investments, cars and even jewellery and furnishings are also included.
The good news? There are ways of reducing the impact of an inheritance tax bill on your loved ones – some less well-known than others.
Few people go rushing out to buy life insurance. It’s not the most glamorous of purchases and, after all, it’s a somewhat morbid topic to dwell on. In this country, far more people insure their pets than themselves. Not everyone needs it – but if your children, partner or other relatives depend on your income to cover the mortgage or any other expenses, life insurance is something you should consider.
Of those who do take out life insurance, only a small percentage put their policy in trust – partly because the benefits are not widely understood.
A trust allows you to set aside an asset to benefit a specified person at a specified point. A life insurance policy is one such asset. Putting it in a trust alters what happens to the pay-out from the policy in the event of it being needed.
Usually, any pay-out would form part of your estate, and therefore be subject to inheritance tax. If the policy is in trust, the proceeds are paid directly to the named beneficiary (or beneficiaries), and are therefore not counted as part of your estate – and not taken into account when the inheritance tax bill is calculated.
Another benefit is speediness. If your life insurance is not held in trust, your family will have to wait for probate to be granted, which can take a long time. If it is in trust, the insurance provider will only need to see a death certificate before paying out, which could potentially be long before probate is granted. This shorter timeframe can be hugely helpful at a difficult time, especially given that inheritance tax is payable within six months of death.
The rules surrounding insurance policies, and everything they entail, are complex, and it is important to speak to a qualified adviser to help you explore the various possible avenues.