While there isn’t a specific UK tax that affects how a Life Insurance policy pays out, your policy could be subject to inheritance tax (IHT).
Inheritance tax is due on the value of the individual’s estate above a threshold of £325,000 if you’re single or divorced, or over £650,000 if you’re married or widowed. Typically, life insurance is taken out to help offer financial protection to your loved ones should you pass away and usually will form part of the individual’s estate for IHT calculation. So the lump sum that would have been used to give your loved ones a financial cushion could be greatly reduced.
When a successful claim is made and the policy is paid out to the estate, it could be subject to an inheritance tax requirement.
You may be able to avoid inheritance tax by putting your Life Insurance policy into an appropriate trust. Before doing so, please speak with a financial advisor or solicitor who can give you additional information and guidance.