By not placing life insurance payouts 'under trust', Brits are forking out an extra £530 million a year in inheritance tax (IHT) needlessly.
That sum has increased by £58 million, or 12%, compared to last year, analysis by IFA network unbiased.co.uk has found.
While life insurance policies are usually free from IHT, if the payout takes your estate to a value of more than the nil-rate band (the 'tax free' limit set by the government) of £325,000, a tax levy of 40% will apply to the payout.
This means that by not putting the policy under trust, a £100,000 life insurance payout could be reduced by £40,000 should someone's estate exceed the nil rate band.
With the average UK house price hovering around £188,000 by the end of the second quarter of 2014, and around £400,000 in London, increasing numbers of homeowners will find themselves nearing or exceeding the nil-rate band.
Sizeable tax bill
Karen Barrett, chief executive of unbiased.co.uk, said: "Many of us want to pass on our estate to loved ones after we're gone but what people don't realise is the sizeable tax bill we might also be handing over in the process. As the housing market continues to boom and the IHT threshold remains static, this leaves many more of us at risk of passing on an unnecessary tax bill.
"Planning ahead can mean your beneficiaries don't pay more tax than they need to as there are many strategies for reducing an inheritance tax bill including wills, pensions, trusts and other tax advice."
Unbiased.co.uk and life insurer Prudential say anyone getting to grips with IHT planning should bear the following in mind:
- The rate of IHT tax can be reduced to 36% if you leave 10% of your net estate to charity.
- Married couples and civil partners can increase the threshold on their estate to as much as £650,000 - available on the death of the surviving partner.
- Transfer of property between married couples or civil partners is completely free from inheritance tax.