Key facts
- Life insurance proceeds paid to the estate are subject to IHT at 40%.
- Writing a policy in trust means the proceeds bypass the estate and are paid directly to the beneficiaries.
- A whole-of-life policy provides a guaranteed payout whenever death occurs — commonly used to cover an expected IHT bill.
- Term insurance can cover the IHT risk on potentially exempt transfers during the 7-year period.
- Premiums paid on a life policy may qualify as gifts from normal expenditure and be exempt from IHT.
Life Insurance and Your Estate
Life insurance proceeds can form a significant part of a deceased person’s estate. If the policy is not written in trust, the proceeds are paid to the estate and are subject to IHT at 40% on any amount above the nil-rate band. This can substantially reduce the amount available for beneficiaries.[1]
Writing a life policy in trust is one of the simplest and most effective IHT planning measures available.
Writing a Policy in Trust
When a life insurance policy is written in trust, the proceeds do not form part of your estate on death. Instead, they are held by the trustees and paid directly to the beneficiaries:[2]
- The proceeds are outside the estate and not subject to IHT
- Payment is faster — no need to wait for probate
- The beneficiaries receive the full payout without any IHT deduction
- Most insurers provide free trust forms that can be completed when the policy is taken out
Key point: It is usually straightforward to write a new policy in trust at the outset. Placing an existing policy into trust can also be done, but may have IHT implications (the surrender value at the date of the trust transfer could be a CLT).
Types of Life Insurance for IHT
| Policy Type | Purpose | IHT Use |
|---|---|---|
| Whole-of-life | Pays out whenever death occurs | Cover the expected IHT bill — guaranteed payout |
| Term insurance | Pays out if death occurs within a fixed term | Cover the IHT risk on PETs during the 7-year period |
| Decreasing term (gift inter vivos) | Payout decreases over time | Matches the reducing IHT exposure as taper relief increases |
| Joint life (second death) | Pays out on the second death of a couple | Covers the IHT bill that arises on the second spouse’s death |
Whole-of-Life Policies
A whole-of-life policy is the most common choice for IHT planning because:
- The payout is guaranteed whenever death occurs
- The sum assured can be set to match the expected IHT liability
- Written in trust, the payout is available immediately to pay the IHT bill
- Premiums can be structured to qualify as normal expenditure out of income
IHT Treatment of Premiums
Premiums paid on a life policy written in trust are technically transfers of value. However, they may be exempt from IHT in several ways:[3]
- Normal expenditure out of income: If premiums are regular, paid from income (not capital), and do not affect your standard of living, they are fully exempt
- Annual exemption: Premiums up to £3,000 per year can be covered by the annual gift exemption
- Small gifts exemption: Premiums of up to £250 per beneficiary
- PET treatment: If the trust is a bare trust, the premium is a PET and exempt after 7 years
Practical tip: Keep records proving that premiums are paid from surplus income. HMRC will want to see that the premiums form a regular pattern, are paid from income (not savings), and that your standard of living is maintained. An annual income and expenditure schedule is valuable evidence.
Gift Inter Vivos Policies
A gift inter vivos (GIV) policy is a specialist term insurance product designed to cover the IHT liability on a large lifetime gift during the 7-year PET period:
- The sum assured decreases over the 7-year term, mirroring the reducing IHT exposure as taper relief increases
- Premiums are lower than level term insurance because the cover reduces
- Written in trust, the payout covers any IHT that arises if the donor dies within 7 years
Frequently Asked Questions
Why should I write life insurance in trust?
If a life insurance policy is not written in trust, the proceeds form part of your estate and are subject to IHT at 40%. Writing it in trust means the proceeds are paid directly to the trustees (for the beneficiaries) outside the estate, avoiding IHT entirely. It also speeds up payment — trustees can claim without waiting for probate.
What type of trust should I use?
Most life insurance trusts are either bare trusts (where the beneficiaries are named and fixed) or flexible/discretionary trusts (where the trustees can choose from a class of beneficiaries). Insurance companies typically provide their own trust forms. Discretionary trusts offer more flexibility but may face periodic charges if the policy has a surrender value.
What is a whole-of-life policy?
A whole-of-life policy pays out on death whenever it occurs (unlike term insurance, which only pays out during a fixed period). It is commonly used for IHT planning because the payout is guaranteed — providing a known sum to cover the expected IHT liability.
Are the premiums subject to IHT?
Premiums paid on a policy written in trust are technically gifts (either PETs or CLTs depending on the trust type). However, if the premiums are paid from surplus income and meet the “normal expenditure out of income” exemption, they are completely exempt from IHT regardless of amount.
Further Reading
- IHT Planning Basics — overview of IHT planning strategies
- Gifts from Normal Expenditure — qualifying premium payments
- Using Trusts for IHT Planning — trust types and their uses
- The 7-Year Rule — how GIV policies match the PET timeline
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