People take out life insurance for the sake of other people. The only person who cannot benefit is the person insured because the policy only pays out on their death. Unfortunately, Her Majesty’s Revenue and Customs (HMRC) sees it slightly differently. They consider any payout from a life insurance policy to be part of your estate which means if its value takes your estate over the £325,000 threshold there will be tax to pay on it.
Many people take out a life insurance policy in order to relieve their heirs of the tax burden, intending any tax to be paid from the life insurance. We’ll look at this in more detail in a moment. But first, let’s consider whether there is any way to avoid IHT on the payout.