There’s a good chance you already know that, from April 2027, unused pension funds and certain death benefits may form part of your estate for Inheritance Tax (IHT) purposes.
This change means more of your wealth could fall within the scope of IHT than you previously expected.
You will likely want to pass on as much of your hard-earned wealth as possible to your loved ones.
So, you may have explored ways to reduce a potential IHT bill, such as making financial gifts during your lifetime.
Read more: What is a “potentially exempt transfer”, and could it help you mitigate Inheritance Tax?
You might have also considered using trusts as part of your estate plan.
Trusts can help you control how and when your beneficiaries receive assets, and, in some cases, reduce the taxable value of your estate.
The Financial Conduct Authority does not regulate trusts.
However, one strategy you may not have thought about is writing whole-of-life protection into a trust.
If not, you wouldn’t be alone. According to Money Marketing, 73% of UK life policyholders don’t place their cover into trusts, meaning a payout could unnecessarily increase the value of their estate.
With that in mind, continue reading to discover how this approach works and whether it could help protect more of your wealth from tax.
Inheritance Tax can significantly reduce what you leave behind for loved ones
When you pass away, IHT will typically apply to the portion of your estate – which includes property, savings, investments, and your pension from April 2027 – that exceeds certain thresholds.
You currently benefit from a “nil-rate band” of £325,000. If you leave your main residence to a direct lineal descendant, you may also qualify for the “residence nil-rate band”, adding an additional £175,000 to your total allowance.
Moreover, if you’re married or in a civil partnership, you can usually transfer assets to your partner free from IHT.
They may also inherit any unused allowances, potentially doubling the amount they can pass tax-efficiently.
Anything above this is typically taxed at 40%.
The Financial Conduct Authority does not regulate tax planning.
While these allowances may seem generous at first glance, it’s important to remember that rising property prices and changes to pension rules could mean your estate exceeds the thresholds more easily than you’d expect.
Even if you take steps to reduce your taxable estate, your beneficiaries may still face a significant IHT bill.
Whole-of-life cover can provide funds when your family needs them most
A whole-of-life policy typically pays out a lump sum when you pass away, provided you keep up with premiums.
Unlike term life cover, which only covers you for a fixed period of time, whole-of-life cover remains in place indefinitely. However, periodic reviews may increase the costs or reduce the levels of cover.
Note that life insurance and financial protection plans typically have no cash in value at any time. If premiums stop, then cover will lapse.
If your estate exceeds the available IHT thresholds, the payout from a whole-of-life policy could provide your family with the funds needed to settle the tax bill.
The payout could even help your family manage other financial pressures at an already difficult time, such as funeral costs or living expenses.
Writing the policy into a trust could keep it outside your taxable estate
It’s vital to note that if you don’t structure your whole-of-life policy correctly, you could unintentionally increase the size of your taxable estate.
If you don’t place it into a trust, the payout will usually form part of your estate when you pass away. This could considerably increase your loved ones’ IHT liability.
Conversely, when you write a whole-of-life policy into a trust, you transfer legal ownership of the policy to your appointed trustees.
They then manage the policy for the benefit of your chosen beneficiaries.
Since the trust legally owns the policy, the payout would typically fall outside of your estate for IHT purposes.
Better yet, placing the policy into a trust could allow the funds to bypass the probate process.
This means your beneficiaries could access the money more quickly, helping them settle the IHT bill without having to sell their assets or use their own savings.
You also have greater control over your assets with a trust. You can specify who benefits, how much they receive, and under what circumstances.
For instance, you may want funds to pass to children only once they reach a certain age or complete higher education.
Trusts are highly complex, so it’s worth working closely with a professional
While writing whole-of-life cover into a trust does come with advantages, it’s essential to note that they are complex.
Indeed, they often involve legal and tax considerations that require careful thought, and the structure of the trust should align with your wider estate planning goals.
This is why it’s often practical to work with a financial planner before setting one up.
With the help of a trusted professional, you can assess your estate’s potential IHT exposure and consider how future changes might affect your position.
Then, you can make an informed decision about whether placing whole-of-life cover into a trust is an appropriate strategy for you.
We could help give you the confidence that your loved ones are more able to manage a future IHT bill without unnecessary pressure.
Please email us at info@investmentsense.co.uk or call 0115 933 8433 to find out more.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
