- Up to £177m in Inheritance Tax from life insurance policies in 2009/10
- Extra paperwork only obstacle between average saving of up to £35,000
- Up to 40% of life insurance payouts could be lost in tax
- Ex spouses could be set for unintended windfalls if paperwork out of date
An urgent review of life insurance policies is being called for after figures from HM Revenue & Customs revealed bereaved families are being hit with Inheritance Tax (IHT) bills totalling up to £177 million.
Sean McCann, personal finance specialist at NFU Mutual, said: "This is completely unnecessary. Life insurance policies should, wherever possible, be written into a trust to prevent a significant chunk going to the taxman. Otherwise, up to 40 per cent of the payout could be claimed in Inheritance Tax.
"What's more, trusts are really simple to set up and, with most life insurance companies providing the forms free of charge, it shouldn't cost anything other than spending a little extra time to complete.
"To avoid paying tax unnecessarily, more people should take advice to reduce their effective tax rate. Up to 40 per cent of life insurance payouts could be lost in tax. Just a few more minutes could save up to £35,000 from the average inheritance tax bill, according to the latest figures."
With more than 5,000 estates with life insurance policies being liable for IHT in 2009/10, there are likely to be many more cases where the policies are a tax problem waiting to happen.
Trusts are used with life insurance policies to help ensure that the payouts do not form part of an individual's estate when they die, which can mean they are free of IHT. They can also allow the money to be paid out quickly without waiting for the estate to be settled.
Sean continued: "If you've taken the sensible step of insuring your life, you should also try to make sure any trust is still relevant to your personal situation.
"Often policies will have been written many years ago and there will be many people who will have remarried or changed relationships in that time but never reviewed their trust
"The thought of an ex-wife or ex-husband getting their hands on part of the inheritance often prompts people to review their situation sooner rather than later.
"We strongly recommend that anyone with life insurance cover take advice on setting up a trust so the taxman doesn't take a slice of what's intended for their loved ones."
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