No one likes to pay tax unnecessarily and Inheritance Tax (IHT) can be especially problematic, as it must often be paid ‘up front’ when administering an estate.

It is quite common for people to decide to mitigate the effects of the tax by writing an insurance policy on a ‘whole of life’ basis to pay the estimated IHT. This can be very tax-efficient if done correctly. Such policies can be written by paying periodic premiums or a lump sum to an insurer. The payments made will reduce the value of the estate on which IHT is calculated.

However, by writing such a policy in trust, a significant saving may be made because, by so doing, the proceeds of the policy can be kept out of your estate for IHT purposes. For example, if you were to write a policy for £50,000 which was payable to your estate (i.e. written on an ‘own life’ basis, with the proceeds payable directly to you or your spouse), then up to £20,000 of IHT could be due on the value of the policy. If, however, the policy were paid into an appropriate trust, there would be no IHT charge as the beneficial ownership of the policy would lie outside your estate.

Pensions which contain a provision that the value of the pension can be paid as a lump sum if you die before taking the pension, or which contain death benefits, can also normally be written in trust and kept out of your estate for IHT purposes.