“Is life insurance taxable?” and other FAQs answered.

This communication is for informational purposes only and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, it is subject to change and we are not responsible for any errors or omissions.

Life insurance and tax. How do they relate to each other, and how does this affect your finances? In today’s uncertain world, it is vital to have a financial safety net in place, ready to protect you and your loved ones. However, you do not want any unexpected taxes arriving, potentially eroding the lump sum (or replacement income) you hope to receive.

Below, our financial planners at Scottsdale offer some answers to common questions about life insurance, tax and how they “fit” into a wider financial strategy.

We hope these insights are useful. If you want to discuss your financial plan with a member of our team in Murcia, please get in touch to arrange a no-obligation financial consultation at our expense:

+34 966 460 407
info@scottsdale.eu

Is life insurance taxable?

As a general rule, if someone receives a payout or income from a life insurance policy in the UK, it is not subject to income tax or capital gains tax (CGT). However, you do need to be careful regarding inheritance tax (IHT).

In 2024-25, IHT is levied at 40% on the value of an estate once it exceeds £325,000. A UK citizen’s estate is “administered” after they die. The executors are responsible for carrying out the wishes of the deceased (e.g. when distributing assets) and need to pay any IHT due using assets from the estate.

How can a life insurance payout be taxable under IHT? If the policy is not written into an appropriate trust structure, a lump sum could be regarded as part of your estate for tax purposes when you die. By writing it into a suitable trust, however, it can be “shielded” from IHT.

Speak with a financial adviser to find out the best ways to set this up.

Are life insurance premiums tax deductible?

It might help to recognise that life insurance is largely separate from the UK’s Income Tax Regime. So, a British tax resident cannot be taxed on any income from a life insurance (or income protection) policy).

Just as HMRC does not claim Income Tax on the policy, it does not extend tax relief to the premiums. So, be careful when filling out your tax return if you need to submit a Self-Assessment! If you are considering the affordability of different policies, make sure to factor the lack of tax relief into your assessments.

Do my beneficiaries pay tax on any life insurance I get?

What if you die and your life insurance pays out? Do the loved ones inheriting your estate need to pay IHT? In the UK, the answer is no. Unusually (amongst European countries), the deceased owner of the assets is responsible for settling their IHT liability.

However, what if you are a British expat living in, say, Spain, and you receive an inheritance from a loved one? If you are not a Spanish tax resident and the assets are located outside of Spain (e.g. a property in the UK), there is no Succession Tax.

However, if you do not meet the exemption requirements, you – as a beneficiary living abroad – could be required to pay tax on a life insurance payout. Seek expert advice from a financial adviser who works with expats for more information.

Can I save tax by giving away any money from a life insurance policy?

In the UK, the “7-Year Rule” allows a gift to be exempted from IHT if the giver survives seven years after making the gift. Naturally, this will not apply to a life insurance payout, which arrives shortly after the policyholder dies!

There is an annual “gift allowance” which lets someone give away up to £3,000 per tax year, without IHT, during their lifetime. Again, this option is not suitable since life insurance only pays out when you die.

There is a caveat to the above two paragraphs. If you surrender your life insurance policy (i.e. cancel it if your policy allows), it may be possible to access money from your policy before you die. For example:

You take out a whole-of-life policy, which pays out £200,000 when you die. After 10 years of paying the premiums, the “cash value” of the policy is £10,000. There is a 40% “surrender charge”, which leaves you with a surrender value of £6,000 after you cancel the policy.

The money could then be used for different purposes, such as making gifts to loved ones. However, surrendering one’s life insurance is a big decision and is usually not prudent. Seek advice if you are considering this option.

Do I pay tax on life insurance surrender?

Again, we want to emphasise that it is best to seek financial advice before surrendering a life insurance policy. However, if this option is chosen, does a “chargeable event” arise?

As a general rule, most whole-of-life policies in the UK fill into the “Qualifying Policy” category from HMRC’s point of view. As such, no chargeable event certificate would be needed, and, therefore, no tax would be due.

However, it is best to check the status of any existing policy with the provider. If the policy is “non-qualifying”, then HMRC can check its tax status when the certificate is sent to them. Any tax due would be declared on a Self-Assessment Tax Return.

Invitation

If you are interested in discussing your own financial plan or inheritance tax strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

+34 966 460 407
info@scottsdale.eu

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