UK to waste £500m on inefficient IHT planning

More than half a billion pounds is set to be wasted this year in inheritance tax as individuals fail to place their life protection policies “under trust”.

The figure, which is up £58m on last year, was revealed in research by unbiased.co.uk, which also found that only a quarter of consumers would be confident in tackling inheritance tax planning without the help of a professional financial adviser.

The professional adviser search company said that failing to put a policy “under trust” could reduce a £100,000 life insurance pay-out by up to £40,000 if an individual’s estate is worth more than £325,000.

It said that this could leave a loved one at risk of a “sizeable tax bill”.

In response to the results, Unbiased and Prudential have launched a checklist of what to consider when planning for inheritance tax.

Head of technical at Prudential, Les Cameron, said: “It is often said that inheritance tax is a voluntary tax due to the number of different ways it can be avoided.

“However, government statistics show that the amount of tax paid and number of families affected has been increasing over the last few years.

“Given the variety of strategies and solutions available I would always recommend seeking professional advice.”

Karen Barrett, chief executive at unbiased.co.uk, said: “As the housing market continues to boom and the IHT threshold remains static, this leaves many more of us a risk of passing on an unnecessary tax bill.”

Last month, HM Revenue & Customs proposed a limit to the amount an individual can transfer into a series of trusts tax free.

In a paper, the government body suggested that each settlor be entitled to a tax free “settlement” nil-rate band that runs separately from, and in line with, the IHT nil-rate band.

If the proposals become law, trustees of all trusts set up by an individual settlor will have one nil rate band (currently £325,000) to share between them in proportions chosen by that settlor. This will inhibit IHT planning strategies, based on the “Rysaffe principle”, which use multiple trusts to reduce the IHT charge on each tenth anniversary of the trust, and on distributions to beneficiaries.