Life insurance: Do your beneficiaries face a tax bill in the future?

Death is one of life’s many inevitabilities, and even though we sometimes don’t enjoy thinking about it, there are some things about it that we simply cannot afford to ignore such as what our funeral is going to look like, and what is going to be left for our loved ones. While we can always prepare for the former by applying for a cheap funeral plan, the latter, however, may require buying an insurance plan. How will an insurance plan help my beneficiary? Some may quip. Well, purchasing a life insurance plan can make a world of difference for your loved ones – when you finally move on – as they get to enjoy cash payouts via your possessions, properties, and even money. Sounds like a great way to put your assets in the right hands!

Unfortunately, though, creating a life insurance plan doesn’t necessarily mean that your beneficiary or beneficiaries will have the ultimate access to all that you leave behind. Even if you can compare insurance with upsave and find the best life insurance deals, there are still some tax rules in the UK that may affect life insurance payouts such as the inheritance tax.

Significance of the inheritance tax
Nothing can be compared with the relief and excitement that comes with being beneficiaries of a life insurance plan, especially when they’ve got some immediate financial obligations to tackle. Take for instance; maybe they are just about to get Scottish debt help to settle their creditors when they learn about the huge amount of pounds waiting to be picked up at the insurance company. But such excitements could soon be cut short when they also learn about the concept of inheritance tax. Whether you leave all your assets to one person or choose to divide aspects of your estate between different friends and family members, tax requirements may mean they end up with less than you had hoped they would. Inheritance tax in the UK may be required to be paid, once the time comes.

How does the inheritance tax work?
Inheritance tax, however, is not something to be feared or worried about. According to reports, it was established that the inheritance tax is not normally required if the total asset value – including money, possessions, and properties – falls below the ₤325,000 thresholds. On the plus side though, if you leave the entirety of your estate to your spouse, a civil partner, or a charity club, no inheritance tax will be charged irrespective of whether or not it’s greater or lesser than the prevailing threshold. But if your children or grandchildren are the beneficiaries, then, the threshold – which will also be raised to ₤475,000 in this instance – will come into effect. Ultimately, the standard inheritance tax rate is 40%, and this is only charged on the remaining part of your estate above the threshold.

Different angles to the concept of inheritance tax
Another important angle to this tax bill is in the form of the payouts. If the insurance policy provides a lump sum payouts or a regular income to your beneficiary, then there would be no income or capital gains tax payable. However, it may be that the payout is subject to inheritance tax. A good example of this can be that your insurance plan provides a payout of ₤400,000, while your assets are worth ₤360,000. In total, this would equate to ₤760,000, so for a single person who has not left their estate to one of the exceptions to the threshold mentioned earlier, upon their death, ₤435,000 would be taxable at the 40% rate.
Alternatively, it could be that your life insurance policy has been created in trust – a legally-acknowledged arrangement, which sees the value of the trust is exempt from the inheritance tax threshold. In this situation, instead of the payouts being made upon your death, it would rather go into the trust fund, which is looked after by a trustee, until it is time for the intended beneficiary to receive it.

Bottom Line
Just the way it is often recommended to get bailiff advice if you have some debt challenges to tackle, it is also very essential that you get the best insurance advice before you proceed with the creation of any life insurance plan.

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