Inheritance tax: Families told of simple way to avoid needlessly overpaying death levy

This means that up to £332million of inheritance tax may have been needlessly overpaid by them.

However, it is possible to become exempt from this tax by “writing” these policies into a trust.

This is done via a procedure requires a phone call to a provider, as well as filling out some paperwork.

This comes at a time when the number of families paying inheritance tax has almost doubled under Conservative rule.

Sean McCann, of advisers NFU Mutual, 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.

“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.

“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.”

It is possible to put a life policy into a trust at any time.

This means you can still exempt any potential pay-out after you have bought the cover.

If you die, your family cannot retrospectively put the policy into a trust, McCann added.

He also explained that if you are seriously ill when you put the policy in trust, and then die within seven years of this, HM Revenue & Customs could argue that the policy had a value when you put it into trust.

Therefore, they could try and include that value in your estate, which would result in inheritance tax being charged.

27,000 paid the death duty 40pc in 2020-21, according to HMRC. The average bill totalled up to £214,000.

This was a big increase from the 15,000 families that paid in 2009-10.

By 2028, roughly 47,000 are expected to pay, according to the Office for Budget Responsibility.

This is because of the “fiscal drag” effect of frozen thresholds, paired with inflation.