Nearly 7,000 families are paying inheritance tax they could have avoided, simply because life insurance policies were not written into trust, according to new HMRC data. The figures show that in the 2023/24 tax year, 6,990 estates paid inheritance tax on life insurance policies worth a combined £852 million, a costly oversight that experts say is entirely preventable.
How the Trust Mistake Creates a Tax Bill
The issue arises when life insurance policies are not written into trust. When a policy is placed in trust, the payout goes directly to beneficiaries, bypassing the deceased's estate for inheritance tax purposes. Without this step, the payout is treated as part of the estate, potentially pushing it above the tax-free threshold and triggering the standard 40% inheritance tax charge.
Ian Dyall, head of estate planning at wealth manager Evelyn Partners, described the number of taxable estates containing life insurance policies as "quite staggering." He explained: "By writing life policies into trust most families can ensure that the payout does not form part of the estate. By not doing it, it can be a real own goal, as a step that should make life easier for executors and administrators of estates, as well as saving on IHT, becomes one that can lead to probate delays and unnecessary inheritance tax."
Rising Inheritance Tax Burden
The HMRC data comes amid a broader rise in inheritance tax liabilities. In 2023/24, a total of 30,400 estates paid inheritance tax, representing 4.72% of all UK deaths, up from 4.62% the previous year. Total inheritance tax liabilities reached a record £7.03 billion, a 5% increase year-on-year.
This trend is partly driven by rising asset values, including pensions, which are inflating estates and pushing more families into the inheritance tax net. Dyall noted: "Today's figures can be treated as a wake-up call for families to seek advice when purchasing life cover, especially as more and more households will be turning to these policies when pensions inflate their estates and potential tax bills."
Most Policies Still Not in Trust
Despite the clear benefits, research from one insurer suggests that more than 77% of single-life term insurance policies are still not written into trust. This leaves a significant number of families at risk of paying unnecessary inheritance tax, often at a time when they are already dealing with the emotional and financial pressures of losing a loved one.
Writing a life insurance policy into trust is a relatively simple administrative step, but it requires proactive planning. Families are advised to seek professional guidance when taking out life cover to ensure their policies are structured correctly and their beneficiaries are protected from avoidable tax bills.
Impact on Families and Estates
The consequences of not writing policies into trust extend beyond the tax bill itself. Executors and administrators may face delays in probate as they deal with the additional paperwork and potential disputes. The payout, which is intended to provide financial security for loved ones, can be reduced by 40% if it pushes the estate over the nil-rate band.
For the 6,990 estates affected in 2023/24, the average life insurance payout was around £122,000, meaning the potential tax saving from using a trust could be substantial. With the number of taxable estates rising, the issue is likely to become more prevalent unless families take action.
Steps to Avoid the Pitfall
Experts recommend that anyone purchasing a life insurance policy, or reviewing an existing one, should ask their provider or financial adviser about writing the policy into trust. This simple step ensures the payout is paid directly to beneficiaries, avoiding inheritance tax and speeding up the process of distributing the funds.
Dyall concluded: "This is a straightforward fix that can save families thousands of pounds. The data shows that too many people are missing out on this opportunity, and it's time for that to change."
