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A Guide to Trusts and Tax Efficient Life Insurance

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When it comes to planning your family’s financial future, it makes good sense to take all steps possible to protect their standard of living. Arranging your life insurance in the right way, to give your loved ones the maximum possible benefit  is an important consideration. One option when taking out life insurance is putting the policy into a trust. And yet according to insurer Aegon, only 6% of life-insurance policies in the UK are set up in this way. 
This is surprising as it can be advantageous and is very simple to do. Many Contractors are now opting for a tax efficient Relevant Life Plan as all policies are written into trust from the outset (in order to meet HMRC qualification for tax exemption) and in doing so place the cost of life insurance on company expenses without alteration to their P11D status (they also benefit from 20% corporation tax relief on the premium too).
What is a trust?
A trust allows you to set aside an asset to benefit a specified person or people (the beneficiaries). The asset is managed by a trustee or trustees until such time as the beneficiary is intended to benefit. So, for example, your spouse may look after property on behalf of your children until they reach a responsible age. Life insurance policies are such an asset, and putting a policy into a trust can affect what happens to the payout from a policy in the event of your death.
Note: In industry jargon, putting a life insurance policy into a trust is known as “writing life insurance in trust” or a policy is “written in trust”. With Relevant Life Plans, you the insured would be a trustee along with your business (thus meeting HMRC qualification for tax exemption as the plan is owned by you and the business). Your spouse or any other nominated person could be a beneficiary. Should you move between business or start a new company you can take your Relevant Plan with you and update the trust as you go.
Trusts can help sidestep inheritance tax
Under normal circumstances, the payout from a life insurance policy will form part of your legal estate, and may therefore be subject to inheritance tax.
By writing a life insurance policy in trust, the proceeds from the policy can be paid directly to the beneficiaries rather than to your legal estate, and will therefore not be taken into account when inheritance tax is calculated. This means the value of your estate may not move above the threshold, depending on your circumstances. Should you opt for a Relevant Life plan not only will the benefit be paid tax-free, the payout won’t count towards your lifetime contribution towards pensions allowance (therefore not pushing you into a taxable banding here either).
You don’t need probate to be granted in order for the policy to pay out
Writing a policy in trust also means the payment to your beneficiaries will probably be quicker, as the money will not go through probate. This is a legal process which confirms an executor’s authority to deal with your possessions. So, for example, if you leave everything to your spouse in your will, then your spouse will have to get probate granted before they can distribute your money, property and so on.
This process can take a long time, even when there is a will. In cases of intestacy (where there is no will), it can drag on for a lot longer. However, if the life insurance policy is put into trust, then it can pay out before probate is granted, as the insurance provider will just require a death certificate before paying out.
You could get greater control over your policy
Writing life insurance in trust allows you to specify how you want the proceeds to be paid out. For example, trustees can be appointed to oversee money for the benefit of children under 18. In addition, setting up a trust means that the payout will go to the people you intend it to.
Does it cost extra?
No, with a Relevant Life plan a trust is required to be implemented from the outset, this option is free when taking out the policy. Some existing life policies can also be transferred into a trust or amalgamated into a new tax efficient policy through your business with a Relevant Life Plan.
The basics of Relevant Life and trusts
At Relevant Life Expert, life insurance really isn’t as expensive as you might think. The benefits are clear and simple:
  • Place 100% of the cost of your life cover on company expenses (even if you have existing plans in place to protect your mortgage or income – swap and save)
  • Benefit from 20% corporation tax relief on the cost of the premium
  • No alteration to your P11D status
  • The policy is written into trust from outset
  • Life cover and terminal illness benefit included
  • The policy can be moved between businesses or converted into a policy paid from your personal account if circumstances change
  • The average we save our clients is £15,000 over the lifetime of their plan simply by swapping to a Relevant Life Plan
So, whether you are already paying for life insurance out of taxed income or you have not yet got around to putting vital life insurance in place or into trust, a Relevant Life policy could be the most tax-efficient solution. 
For more information, contact Relevant Life Expert on 01202 700053 or request your free impartial quote here.
You’ll also be able to see how much you can save on the link above with our Relevant Life Calculator.

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