Do I have to pay taxes on life insurance?
Although there is no specific tax on life insurance, either when you buy or in the case of a valid death claim, the value of your life insurance policy may be subject to inheritance tax if it is part of your heritage.
Are life insurance premiums tax deductible?
Most life insurance policies are excluded from the current UK income tax regime. Personal life insurance premiums are not tax deductible, but in the event of a valid claim, the cash sum will not be subject to income tax.
Reading: How much is life insurance taxed
what is inheritance tax?
inheritance tax (iht) is a tax on the estate (property, money, assets and possessions) of the deceased person’s estate after all other debts and funeral expenses have been deducted.
iht threshold and rates 2022-2023
Everyone in tax year 2021-22 has £325,000 tax-free inheritance tax relief, which is generally known as the zero-rate band. the allocation has remained the same since 2010-11.
The standard inheritance tax rate is 40% of anything in your estate over the £325,000 threshold.
for example, mr. Bob left £500,000 worth of estate, the tax bill will be £70,000 (40% of £175,000, the difference between £500,000 and £325,000).
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If the value of your estate is below the £325,000 threshold, there is normally no inheritance tax to pay; however, your personal legal representative must notify hmrc.
for married couples or civil unions, they can leave more than this before paying taxes.
As of April 2017, you can also pay less inheritance tax if you leave property to a relative. these could be her children (including adopted, foster, or stepchildren) or grandchildren. for fiscal year 2021-22, this new transferable allowance increased to £175,000, up from £150,000 in 2019-20.
Can I gift money to avoid inheritance tax?
As mentioned, if your estate is worth more than £325,000 (or £650,000 for married couples and civil unions), then there will be an inheritance tax liability.
You are allowed to make some gifts without paying any taxes after your death. These typically include gifts for your spouse or civil partner, or if you want to leave money for a charity.
One way to reduce your estate tax liability would be to gift assets while you are still alive. you can donate up to £3,000 in total in each tax year you are alive.
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You can carry over any unused portion from one year to the next year (so if you didn’t use this allowance last year, you could gift a total of £6,000). this gift is technically called your ‘annual exemption’.
A married or civil couple can gift £6,000 each and potentially £12,000 if they didn’t use their previous tax exemption. You can also make unlimited donations of up to £250 to other people in any tax year
You can make gifts in consideration of marriage or civil partnership up to £1,000; In addition to this, you can also give up to £2,500 to your grandchildren and £5,000 to your children. these gifts must be made before the wedding or civil union; however, it is important that the wedding takes place after this, otherwise it could be classified as exempt transfers.
If you make gifts on top of your annual exemption, it would also include donations to people made more than seven years before your death.
If you make a gift within seven years of your death, it may be included in your estate for inheritance tax purposes. this can be reduced by using a tapered relief on the gift made.
Will I pay taxes on the payment of critical illness coverage?
the value of a valid critical illness claim will not become part of the estate, unless you are diagnosed with or undergo a medical procedure for one of the specific critical illnesses we cover, and survive 14 days from diagnosis, then the policy may pay after your death. in which case the amount of coverage will be payable to your estate and may be subject to inheritance tax, above £325,000. the same applies to a valid terminal illness claim.
put your life insurance ‘in trust’
another option is to put your life insurance ‘in trust’; This is a legal agreement that allows you to leave assets to friends, family or whomever you choose as your beneficiary, and it will not be considered part of your estate, so you will not be subject to taxes on the value of your life insurance.
We’ve put together a helpful article with more information on putting life insurance in trust detailing the ways you can benefit from taking this popular option.
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