Are you worth more when you are dead?
Sophie Guiver
Advising business’s & individuals on the benefits of financially protecting what’s important.
Are You Worth More When You're Dead?
Millionaire are leaving the UK and one of these reasons is Inheritance tax! You may not be a millionaire, but you've probably want to protect what you've built, right?
One of the key advantages of having a financial protection policy is the control it gives you to ensure that any money paid out goes to your business or beneficiaries tax-free. This becomes particularly important when considering the ever present concern of inheritance tax.
The Inheritance Tax Dilemma
Inheritance tax is a hot topic right now. It often feels like we are worth more dead than alive to the government. If it's not council tax, road tax, income tax, or corporation tax... it almost feels like there's a "breathing tax." And yes, even when you stop breathing, taxes can still apply. Apologies for the bluntness but this is the reality.
The Underutilization of Trusts
In 2022, only 17% of new term life insurance policies in the UK were written in trust, according to a survey by Swiss Re. This means nearly 4 in 5 policies (78.9%) were not placed in trust. This is shocking when you consider the significant benefits trusts provide, including:
While this statistic applies only to personal life insurance policies, it highlights a major gap in financial planning.
What you should consider.
The UK nil-rate band for Inheritance Tax is ￡325,000, frozen until April 2028. An additional residence nil-rate band of ￡175,000 applies if a main residence is passed to direct descendants, bringing the total allowance to ￡500,000 per individual. For married couples or civil partners, unused allowances can be transferred, allowing up to ￡1 million to be passed on tax-free.
Why Trusts Are Essential for Business Life Insurance
For life insurance policies paid for through your limited company such as a Relevant Life Policy a trust is mandatory. Why? To ensure that the pay-out does not go back into your limited company but instead reaches the people you want to benefit from it. Trusts are free to set up for all lump-sum-based pay-outs, including:
The primary purpose of trusts is to keep the pay-out separate from your estate, preventing it from increasing the value of your estate and therefore reducing potential inheritance tax liabilities.
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How Trusts Are Set Up
A trust involves three key roles:
Interestingly, the trustee and beneficiary can be the same person.
When Might You Not Need a Trust?
There is some rationale for not setting up a trust if you're married and have a personal life insurance policy. However, given that setting up a trust is often as simple as completing an online form with your adviser, it's better to be safe than sorry.
Flexibility of Trusts
Most trusts are flexible, meaning you can change, remove, or add beneficiaries over time using a "Deed of Appointment." However, you will need consent from your current trustees to make these change, hence the name!
Final Thoughts: Take Action Now
If you have a personal life insurance policy, I strongly urge you to ensure it's written in trust. For business owners, consider setting up a Relevant Life Insurance Policy, which can help mitigate inheritance tax issues while protecting your loved ones and business interests. By taking these steps, you can secure peace of mind knowing that your financial protection policies will work exactly as intended...whether you're alive or not!
Feel free to get in touch, if you need some help around this.
PS: Don't worry I'm free to talk too & no taxation applies.
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