Whether it’s income tax or road tax, tax when you buy a home or even those which are not called taxes but many consider to be, such as National Insurance, they pretty much affect us all at some point.
One tax however which, for many us, may feel like something just for the very wealthy is Inheritance Tax or IHT - we’ve all seen the TV dramas where an elderly relative dies and this suddenly places a huge tax burden on the family!
Well, it may come as a surprise that actually IHT can, ultimately, have an impact on an increasing number of us, and, regardless of what stage of life we are at it’s probably quite useful to be aware of it, and how it might have an impact on what you leave to your loved ones – possibly in the most ordinary and unexpected of ways.
IHT is a tax on the property, money, assets and possessions you leave behind after all other debts and funeral expenses have been deducted.
Currently, everyone has a tax-free IHT allowance of £325,000. This is usually referred to as the nil-rate band. The standard IHT rate is 40% of anything in your estate over the £325,000 threshold. Married couples of civil partners can leave more than this before paying tax.
Now, whilst you may not have the riches of Downton Abbey, one financial product that most of have, certainly those with a mortgage, is life insurance. And although there is no specific tax on life insurance when you buy it or there is a death claim, the value of your policy may be subject to IHT if it forms part of your estate.
Of course, it’s extremely easy these days to jump online and take out life insurance or a critical illness policy which is great – but it’s unlikely that thoughts of IHT thresholds will be front of mind.
So while taking out life insurance is a very important aspect of financial planning it shouldn’t be done without taking into account the potential consequences and impact on your future financial legacy.
One option to try and provide some protection would be to think about putting your life insurance into a trust – a legal arrangement that lets you leave assets to whomever you choose to be your beneficiary and will not be included as part of your estate and therefore subject to tax.
It goes without saying that professional legal and financial advice should always be a consideration, especially as part of your wider financial planning, before making any decisions.
Life insurance is important but it doesn’t have to be taxing.
