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chesterton_fan Mar 5th 2019 1:47 am

UK Inheritance Tax on a US-based life insurance policy

I'm a UKC green-card holder, and resident in the US. I expect to be eligible for naturalisation as a USC in a couple of years. My wife is USC by birth, UKC by naturalisation.

I have a question about UK inheritance tax and a life insurance policy. I am almost certainly UK-domiciled for IHT purposes, and my wife is almost certainly non-dom. Therefore, if I die, my estate can pass on a tax-free amount of GBP650k to my wife (325k zero-rate band, 325k non-dom spouse exemption).

This is about $850k, and my net worth is less than that, so I haven't thought about it until now. But I'm looking at taking out a life insurance policy that would push my estate well over $850k if it were to pay out. My wife could be facing a six-figure tax bill if I died, which I am obviously very eager to avoid!

(We're not rich enough to worry about US federal estate tax, and our state has no estate tax -- this is purely about UK IHT.)

I can think of two possible solutions:

1) My wife is both policyholder and beneficiary of a policy that insures my life. Thus, my estate has nothing to do with the policy. I would inherit the policy if she dies first. Other than what would happen in the case of marital breakdown, I see no downsides to this. (Her estate would not be liable for UK IHT so there is no issue there.)

2) An irrevocable trust. From what I've read, this is complex and can't be done without an attorney's help.

I'm obviously not seeking detailed tax advice on the forum, but I was wondering if anyone else has faced this problem, and if so, what they ended up doing?


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