| Introduction | Life insurance | Pensions | Savings | Investment | Ten tax-saving steps |
Life policy payouts
The payouts from the majority of life insurance policies are free of personal tax. But that doesn’t mean you can forget about the issue of tax altogether where your life cover is concerned.
When you die, the proceeds of your life insurance policy are paid to your beneficiaries, and may be subject to inheritance tax (IHT). This tax is charged at 40% on assets over £312,000 (2008/2009) if you are single, and assets over £624,000 (2008/2009) if you are married or in a civil partnership. The assets which form the value of the deceased’s estate includes the value of their home, car, jewellery and any other possessions which could land heirs with a big tax bill. For every £312,000 of taxable assets you leave behind could create an IHT bill of £124,800 for your heirs to pay.
An IFA is best-placed to advise you on how to mitigate inheritance tax and to make sure your financial planning is as tax efficient as possible.
Transfers and gifts between spouses and civil partners are currently free of IHT, and so IHT will not be due if you leave your assets to your partner. Tax will be due eventually when the surviving partner dies if the value of their estate is more than the IHT tax threshold of £624,000.
There are a whole host of ways in which an IFA can help you minimise the amount of IHT your heirs will face. For example, it may be possible to arrange your life insurance in such a way that the proceeds remain outside your estate, and can be used to meet the IHT liability arising from other assets.
Tax advantages
Life insurance is not only a way of protecting your family, but can also be a tax-efficient way to save for the future.
Some life policies are structured as bonds, which allow you to fund the policy with a single lump-sum investment and if you want you can draw a regular income. Within certain limits this income is free of immediate tax and if you are a basic rate tax payer, may remian free of all tax.
Offshore life insurance bonds, based in tax havens like Jersey or the Isle of Man, can be used to defer UK residents income tax until the investor falls to a lower tax bracket. Although not suitable for everyone, these products can be used by investors with £5,000 or more to invest.
Due to the additional complexities of offshore taxation, should you decide to use offshore bonds, it is vital that you get all the details of the arrangement right, so be sure to ask an IFA to help you.
