The Office of Tax Simplification (OTS) has recommended the government consider ensuring death benefit payments from term life insurance policies are IHT-free on the death of the life assured, without the need for them to be written in trust.
The recommendation is in the OTS's second report on the Inheritance Tax Review. Its first report, in November 2018, was prompted by a request from the chancellor in January 2018 for a thorough review of the inheritance tax (IHT) landscape.
The recommendation from the OTS comes after the discovery few term life insurance policies are written in trust, despite the advantages of doing so, meaning that death benefit payments often form part of the deceased's estate and so are potentially subject to IHT. It did however acknowledge that these death benefits will quite often be covered by the spouse exemption or the nil rate bands.
While welcoming the recommendations Royal London product architect Ian Smart said he wanted the focus now shifted towards whole-of-life cover, adding: "The recommendation for term insurance policies to be taken out of the IHT net is a step in the right direction, but we would encourage the government to go further.
"While the OTS believes that whole-of-life policies are used for a combination of protection and investment, we know this isn't the case. Very few new whole-of-life policies written since the retail distribution review acquire any sort of value other than on death.
"We therefore call on government to also exclude whole-of-life policies that do not acquire a surrender value from inheritance tax. Clarity is also needed on terminal illness benefits, which are commonly included in both term and whole-of-life policies."
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