"Where individuals are taking out life insurance it would often be recommended that these polices be held in trust to avoid their proceeds being taxed"
Over 6.9 million parents (20%) have transferred assets to their children to mitigate the amount of inheritance tax payable on their estates, according to research from Direct Line.
This amounts to a total of £227 billion, at an average of £32,920. A further 6.5 million (19%) parents have not yet transferred assets to their kids but plan to do so in the future.
However, despite the inheritance and capital gains tax implications of gifting, just 20% of people with a life insurance policy have placed it into trust to avoid payments being included in inheritance tax calculations.
Additionally, almost a fifth of those with a life insurance policy admit they did not know this was an option.
The increasing number of broken marriages are also making inheritance planning even more complicated, with divorcees transferring assets to named beneficiaries early to avoid them going to their new partner if they remarry.
15% of divorcees have already transferred assets to their children or has placed them in trust, gifting on average £16,603. Another 37% of divorcees plan to transfer money in future if they remarry.
Jane Morgan, business manager at Direct Line Life Insurance, commented: “Worrying about what happens to your children when you’re no longer around is natural for any parent and it is understandable that people want to maximise the money they leave behind. However, it is important that people planning to transfer money understand the tax implications that a gift might give rise to.
“With almost one in ten parents placing their assets into trust, this is something people should also consider when arranging their life insurance. Placing a life insurance policy into a trust could avoid payments being included in inheritance tax calculations. However, despite this, just 20% of people with a life insurance policy have placed this into trust and almost a fifth of those with a life insurance policy admit they did not know this was an option.”
Philip Munro, partner at law firm Withers LLP, added: "Lifetime gifting is a strategy that can be used to reduce a future potential inheritance liability and will appeal to many parents who want to provide for their children, particularly as they may be struggling to access the current housing market. However, there can be inheritance and capital gains tax implications in the making of gifts and so parents should consider taking tax advice.
“Where individuals are taking out life insurance it would often be recommended that these polices be held in trust to avoid their proceeds being taxed on the death of the life insured."