Gordon Brown’s latest budget has changed the tax rules on life insurance policies written in trust. Regular readers of our Blog will know that we have consistently reminded people taking out life insurance, that they should have their policy written in trust in order to avoid future Inheritance Tax (IHT).

The new rules introduced at the recent budget mean that even if your policy is written in trust and there is a claim on your policy, your estate will have to pay a tax charge of up to 6% on the value of the payout that comes above the IHT threshold of £285,00. This new rule applies from 5th April 2006.

Whilst this new tax is not to be welcomed, the new tax is only 6% which is still better than the 40% your estate would have to pay if your life insurance policy had not been written in trust. So, we believe that it is still worthwhile writing your life insurance policy in trust.

Having said that, there is now a danger that the tax charge of up to 6% could mean that there is insufficient IHT free cash generated by your policy to achieve your financial objective. If this is the case, don’t take any action just yet.

The Association of British Insurers (ABI) is meeting the Treasury this week to discuss the situation thrown up on life insurance policies by these tax changes. The insurance industry believes that the Government brought in the package of anti IHT avoidance measures, which included life insurance policies written in trust, without fully appreciating the impact on the man and woman in the street. Some commentators believe that the Government will back track and take life policies out of these anti trust measures. We’ll see!

Even if the new tax measures are not rescinded, existing life insurance policy holders should be aware of the transitional arrangements which will reduce their estate’s tax bill. The Treasury is saying that only the part of the policy that was in force after budget day will be caught in the IHT net. This means that if you have a 15 year policy for £100,000 and it has already been in force for 5 years, then only 66.6% of any payout would be subject to the new 6% tax – so in this example, your estate would have to pay tax of £3,999.96 if your estate, excluding the insurance payout, fully exceeded the IHT £285,000 threshold.

We will provide our readers with an update as soon as we hear the outcome of the ABI’s meeting with the Treasury this week.

Life Insurance FAQ’s
More Life Insurance Articles
Request a Life Insurance Quote

Technocrati Tags[life] [insurance]