Understanding life insurance policies written into trust

Life insurance policies can be useful ways of making sure our loved ones are financially secure in the event of our death or diagnosis with a terminal illness.  They can also be tax-efficient investment vehicles. 

Types of policies

Policies can take various forms: some will cover a mortgage to protect the house, with benefits decreasing down to nothing during the course of the term.  Others will provide for a lump sum to be paid out on a particular event.  Some policies will allow you to “cash out” and withdraw a lump sum, or take a regular income.  Some require you to pay regular premiums over the term, and others are funded by a single lump sum premium.

Whatever type of policy you have, it may be possible to write it into trust.     

What is a life policy written into trust?  

Writing a life policy into trust can be a useful way of maximising any potential pay out, as this can, under certain circumstances, place the value outside of the policy-holder’s estate for Inheritance Tax (IHT).  You could also use a trust arrangement to give another person the benefit of the policy when it pays out. 

Another advantage of setting up a trust is that it may be possible to pass the decision as to who receives the pay-out, and when, to the trustees you nominate.  It is therefore flexible and can take account of circumstances which you may not be able to predict.  However, you may be considered to be “gifting” the benefit of your policy when you place it into trust, and there may be an immediate charge to IHT.

Will I have to pay tax on the pay-out?

Pay-outs from UK based life insurance are not generally taxable.  However, you should carefully check the terms of the policy as the rules are complex. 

If the policy is written into trust, HMRC are unlikely to require the trust at that point is registered on the Trust Registration Service (TRS).  However when the pay-out is made, it will be made to the trustees, and at that point there may be a requirement to register.  Equally, pay-outs may be taxable on the trustees, or there may be tax to pay by the person’s estate, if their death triggered the pay-out.

In summary, the tax rules on life insurance are complex and you should seek professional advice. 

Please contact Bethan Chant on 01628 301221 or bethan.chant@theburnsidepartnership.com if you’d like to talk about life policies, your trust options, and how they are taxed.