Why the Taxman loves Death-in-Service benefits

03 Dec Why the Taxman loves Death-in-Service benefits

Ironically, you may be worth substantially more dead than alive! In many cases this is due to Life Assurance – the one kind of insurance you buy that you will never actually benefit from yourself.
However, an often overlooked asset comes in the form of employee’s ‘Death-in-Service’ (DIS) benefit. Provided by many employers, this benefit might be 3-10x salary, and when added to the total value of your estate can cause major Inheritance Tax implications.

The problem being that, if you have a DIS benefit, you will usually have appointed a beneficiary to receive it on your death. The effect of nominating somebody is that it pays out ‘outside’ your estate, and is therefore not liable to Inheritance Tax (IHT) on your death. But that does not solve the tax problem.

As most people nominate their spouse or partner as the beneficiary; it means their estate has now increased by 3-10x your salary. If your joint estate is over £650,000 for married couples/civil partners, or £325,000 for others, this leaves the survivor with a much increased Inheritance tax bill on their death – payable at 40%.
Thankfully, there is a simple solution to this. Instead of nominating your spouse/partner, we can set up a specific Discretionary Trust, known as a ‘Pilot Trust’ in your lifetime, and nominate the Trust as the beneficiary of the DIS benefit. The importance of the Trust being ‘discretionary’ is that the Trustees (normally including the surviving spouse) have the ‘discretion’ of who to benefit, so that nobody is deemed to have an absolute right to the fund, which will then not fall into any individual’s estate for inheritance tax purposes.

The beneficiaries of this Discretionary Trust can be eg: your surviving spouse or partner, your children, and future generations. As a result of this structure, your surviving spouse can have use of the assets in the trust by ‘borrowing’ anything they need; and on their death the ‘borrowed’ money is paid back before inheritance tax is calculated, so their estate doesn’t increase at all for tax purposes.

For example; If you earned £60,000 p.a, and your Death-in-Service benefit was 5x your salary, the payment of £300,000 into a Trust rather than direct to your spouse could save up to £120,000 in inheritance tax on their death!!

It’s quite simple really….. who would you like to benefit from that £120,000? – your family, or the Taxman?!