Did you know that certain insurance policies can help you with your tax planning? From helping you manage your cash flow to reducing your family’s Inheritance Tax (IHT) liabilities, there can be various advantages. So, how exactly does this work and which policies are relevant? We look at the tax benefits of putting protection in place, including life cover.
Life insurance, estate and Inheritance Tax planning
There are various ways that insurance policies can help you with your tax planning:
- Life insurance and Inheritance Tax (IHT): Life insurance can provide a lump sum to help you pay an IHT bill. As a beneficiary, the main benefit is that you won’t have to sell property or other assets to pay this tax. However, if a policy payout is part of your estate, it could be included within IHT. Therefore, you will need to check ownership and the beneficiary structure. Putting a policy in trust could be an option.
- Life insurance in trust: When written in trust, this could ensure a life insurance payout is outside the insured person’s estate. This may help to reduce inheritance tax on the policy payout.
- Trust-based life cover gives faster access to money: As beneficiaries get quicker access to money, this can be helpful when IHT needs paying before probate is finished.
- Policy premiums are usually not tax deductible: For personal life insurance, the tax benefit comes mainly from estate planning, rather than income tax relief. However, a life insurance payout is normally tax-free.
- Premiums paid into a trust may sometimes be treated as gifts: This applies to inheritance tax only. These gifts may fall within normal exemptions, such as regular gifts from an income or within the annual gift allowance.
The benefits of business insurance
Business protection can also be used as a tax-planning method. There are various policies that are tax-deductible and can help you reduce Corporation Tax or income tax.
- Relevant Life Cover: As a ‘benefit-in-kind’, Relevant Life insurance is paid for by the company for employees without being classified as a taxable benefit (P11D). This can help your business save income tax and National Insurance.
- Key Person Insurance: This policy protects against lost trading income if a key employee isn’t able to work, so the premiums are typically treated as allowable business expenses. This can help to reduce a company’s Corporation Tax bill.
- Business-related medical insurance: As an employer-paid form of cover, business-related private medical insurance is a taxable benefit for the employee. However, it doesn’t reduce family tax bills in the same way as life insurance.
Review your insurance policies
In most cases, should you ever need to claim on other policies, such as income protection or critical illness, these are usually tax-free. Review your protection plans after a big life event, such as marriage, divorce, buying property, or receiving an inheritance. Major changes in your life can increase your family’s level of risk and tax exposure.
When assessing your policies, start by protecting those who depend on you the most, such as your children. Next, structure your money in a tax-efficient way to ensure your policies are aligned with your protection strategy. For guidance on different insurance policies, see our blog What would happen financially if you’re unable to work?
Fixed fee financial planning
Insurance policies can help you protect your family’s cash flow and tax planning through efficient estate management. This might include reviewing your life cover, putting policies in trust (if appropriate), and making use of various tax allowances.
At Balance: Wealth Planning, our fixed-fee financial planning covers protection and tax planning, as well as pensions, savings and investment strategies. Our financial planners will check your existing policies to see if you have adequate cover in place. We’ll also look at various ways to align your policies with your tax planning.
For insurance and tax planning advice, get in touch with our financial planners.
Sources:
https://www.gov.uk/trusts-taxes/trusts-and-inheritance-tax
https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief
https://www.ageuk.org.uk/information-advice/money-legal/income-tax/income-tax/
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm20012
https://www.legalandgeneral.com/insurance/life-insurance/guides/life-insurance-and-tax/
https://www.money-minder.com/protection/life-insurance/information/payout-taxed.jsp
