Inheritance tax (IHT) has come in for much criticism and the government has addressed these issues by raising the threshold to £ 325,000 (2010) – In real terms you only pay inheritance tax if your estate is valued at more than £ 325,000.
But what if the incoming lie policy is £ 200,000 – You have valued your estate at £ 300,000 this puts the individual under the current IHT threshold, the life company pays out the £ 200,000 lump sum to the estate and this takes the value of the estate to £ 500,000 – Do you now pay inheritance tax?
The short answers is no. Life policies do not form part of the estate for the purposes of calculating the individuals inheritance tax liability.
In some case the life policy will have been established to pay the inheritance tax.
For example Mr Green may have an IHT liability of £ 30,000 on his estate – you could take out a life insurance policy to cover the IHT bill. If Mr Green passed away the life policy would pay out to his estate or beneficiary to cover the IHT demand. Mr Green would of course need to pay a premium for the cover.
This type of life insurance product is called 'whole of life' – the policy would pay a set amount on death at any time during the individuals life – as opposed to term insurance which pays out during a set term.
What ever the circumstances if the individual has taken out a life policy on either whole of life or term basis there is no inheritance tax liability.
As discussed the lump payment does not form part of the estate when calculating any IHT due to the revenue.