Taxes, as we all know, are a fact of life.
Whether it’s income or road tax, the levy 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.
Another kind that for many of us may feel like something just for the very wealthy is inheritance tax, or IHT.
Tax burden
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 IHT can, ultimately, have an impact on a growing number of us.
Regardless of what stage of life we are at, it’s probably quite useful to be aware of IHT and how it may impact on what you leave to your loved ones – possibly in the most ordinary and unexpected of ways.
What exactly is IHT?
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.
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Married couples or civil partners can leave more than this before paying tax.
Now, while you may not have the riches of those in Downton Abbey, one financial product that many of us have – certainly those with a mortgage – is life insurance.
And although there is no specific tax on life insurance either 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.
This 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.
Might a trust be the answer?
One option to try to give some protection for your estate would be to think about putting your life insurance into a trust – a legal arrangement that lets you leave assets to whoever you choose to be your beneficiary.
It will not then be included as part of your estate and, therefore, subject to tax.
It goes without saying that professional advice should always be a consideration, especially as part of your wider financial planning, before making any decisions.
Aileen Entwistle is a private client partner at law firm Aberdein Considine.
