Government coffers received a welcome £216 million boost from life insurance pay outs – but virtually every penny could have been saved.
The figures from HM Revenue & Customs (HMRC) revealed families and loved ones had to pay inheritance tax on 40% on the value of life cover over £325,000.
But all the tax could have been kept by the bereaved if the deceased person had written their life insurance policy into a trust.
All this takes is a few minutes administration as most life companies supply template trust agreements to protect policy pay-outs.
The average family could have saved £41,000 in tax if the deceased had taken the time to write the policy into trust.
Unnecessary tax bill
Now, insurers are urging customers to check their policies are written into trust to avoid paying the unnecessary extra tax.
Writing a policy into trust excludes the pay out from inheritance tax.
Instead of the money going through probate or waiting for an executor to finalise the deceased affairs, the money is paid directly to the beneficiaries on proof of death.
The HMRC figures show the inheritance tax problem is worsening. Almost 5,300 beneficiaries were saddled with an unnecessary tax bill in 2011-12, from when the last figures are available.
The number was up 5% in two years.
Sean McCann, a chartered financial planner at NFU Mutual, said: “Paying this inheritance tax is unnecessary and should not happen to any family.
“Life insurance is easily written into a trust and this bypasses inheritance rules and allows the beneficiaries to keep all the money without any tax deduction.”
McCann explained that the HMRC figures who 75,000 failed to write a life insurance policy into trust in 2011-12, but the majority did not have to worry about inheritance tax because the total value of their estates was below the £325,000 trigger threshold.
“This money is often a financial lifeline to a family business which has lost a key member or to families who would otherwise struggle to make ends meet,” he said.
“Most insurance companies give trust forms to customers for free and they are straightforward to fill in, so there should be no reason why they are not completed.
“Even if the estate is below the threshold, writing the policy into trust still speeds up the process of paying a claim, so is a big help to family and loved ones who may need the money.”