Taking out a life insurance policy to pay some or all of an Inheritance Tax bill can make things easier on your family when it comes to sorting out your estate after your death.
It can help protect your home and other assets from having to be sold to pay an IHT bill, which must usually be paid before probate is granted. This gives you the peace of mind that you’re not leaving your family and friends with a hefty tax bill to pay when you die.
Normally, IHT needs to be paid before probate can be issued. But where property is concerned, HMRC might accept staged payments until the property is sold. Or a bank might release money if it’s paid direct to HMRC to pay an IHT bill.
A delay in payment can result in HMRC charging penalties and interest on the amount of the Inheritance Tax which should have been paid.
Most life insurance policies will count as part of the estate unless your policy is written ‘in trust’, which can often be done at no extra cost when taking out your policy.
This means that any money is paid out to your beneficiaries and not to your legal estate. So any payout won’t count towards your threshold and won’t be subject to IHT. This would avoid a lengthy probate process, so your beneficiaries will get their money much more quickly.
A whole-of-life insurance policy is often used for this purpose, which remains in force until the policyholder’s death, as long as you continue paying the premiums.