Inheritance tax & Joint Insurance Policies

Most holders of life insurance policies don't put their policies in trust. For most UK expats (and other nationalities) putting the policy in trust is a common sense tax saving opportunity.

By putting it in trust it has two benefits:

  • Firstly it ensures that the insurance payout is not included in your estate for UK inheritance tax purposes
  • Secondly, it ensures that your beneficiaries can access the cash quickly as it will be paid directly to them rather than having to be classed as part of the estate and subject to probate, etc

The reason why people usually choose to have their life insurance policy written in trust is that the money can go directly to where it's needed, for example to the mortgage provider to pay off the remortgage, or to family members so they can use the tax-free money immediately.

The procedure for putting the policy in trust is usually very straightforward, and most insurance companies will offer this for free. The documentation from the insurance policy usually includes a box to tick if you want to put it into trust. You'd then need to provide the name(s)of the beneficiary under the policy (i.e., who you want to benefit). Joint life insurance policies

Certainly, for individual insurance policies, it's pretty straightforward. What's the position with a joint insurance policy though?

In this case, the policy pays out on the death of (usually) the first to die. Using a joint life insurance policy makes the position potentially complex, and the tax treatment would depend on the specific wording of the policy. Ignoring the trust issue if you and your partner are joint policyholders there are three possibilities:

Firstly you are both beneficial tenants in common and the interest of the first to die passes under his/her will. In this case the share of the first to die forms part of their estate and, subject to exemptions, UK Inheritance Tax is payable on the value of that share.

Secondly, you are both beneficial joint tenants and the interest of the first to die passes to the survivor. In this case, the same consequences will follow, and the receipt would be potentially subject to inheritance tax.

Note that in either of these cases if you were married the spouse exemption would be available to avoid IHT on the death of the first spouse.

What about putting a joint policy in trust?

You could put a joint policy into trust. As we've seen, the benefit of a trust is that it could avoid IHT on the death of the first partner.

However, writing a joint policy in trust is likely to be more complex than a single policy. There are standard forms available from the insurance company that can allow the trust to be set up.

It is usually a very straightforward process. In many cases, single life policies are preferred to a joint life policy. The costs involved are not significantly more, but it is simpler to write into a trust and offers added protection & flexibility.