Over £280m of inheritance tax may have been unnecessarily paid on life insurance policies in 2018/19 which could have been avoided if the policies had been written in trust, according to a leading Chartered Financial Planner.

Over 6,000 estates - worth £709m - that paid inheritance tax (IHT) in 2018/19 included life insurance policies.

Policies can be easily excluded from IHT if put into trust, says Chartered Financial Planner Sean McCann from NFU Mutual who has flagged up the issue.

The 'error' means that over £280m was paid out in IHT that could have been avoided.

If the policies were written in trust, they would not normally form part of the deceased’s estate and would therefore not be liable for inheritance tax.

Of the 22,100 estates that paid inheritance tax in 2018/19, more than a quarter of them (6,040) included life insurance policies, NFU research has revealed.

Mr McCann said: “Many people buy life insurance without advice, so aren’t aware that if they don’t put the policy in trust it’s included in their estate and could end up being taxed at 40%.

“Putting life insurance policies into trust is relatively straightforward. If you have life insurance and it isn’t in trust, phone your provider and ask for a trust form.

“Provided you’re in good health when you put it into trust, there are normally no inheritance tax implications, as in most cases the policy has no value.

“However, if you are seriously ill when you put the policy in trust and die within seven years, HMRC could argue that the policy had a value when you put it into trust and seek to include that value in your estate and charge inheritance tax.

“Using a trust can also mean a speedier pay out in the event of a claim, as the family won’t need to wait for probate, which can make a huge difference to dependants relying on the money to cover day to day bills.”     

According to HMRC tax receipts, the government collected £2.1bn of inheritance tax between April and July this year, which is £500m more than the same period last year.