Metis AM
Inheritance Tax (IHT) payments are rising. MoneyWeek reports that the Treasury expects £9.1 billion to be paid in IHT in 2025/26, and it predicts that IHT receipts could reach £14 billion by 2029/30.
As a result, you might be looking for tax-efficient ways to pass on wealth. In some cases, life assurance can be used to mitigate your estate’s IHT liability.
However, without placing it in trust, your loved ones could lose out on the potential tax efficiencies of life assurance. In fact, in 2022/23, Assurance Business reports that nearly 7,500 families faced an IHT charge on life assurance payouts that could have been avoided by using a trust.
Read on to discover how life assurance could be used to reduce your estate’s IHT liability, as well as the downsides of taking this approach.
Life assurance could give you peace of mind
Often, life assurance can offer reassurance that your loved ones will be taken care of financially after you pass away.
These schemes will generally charge a monthly premium and pay out a lump sum after you die, with certain exclusions. You may also be able to get an early payout if you are diagnosed with a terminal illness.
Usually, you can choose to either be covered for your whole life or for a fixed term, with the level of cover remaining fixed, increasing, or decreasing over time. The most suitable type of cover for you will depend on your circumstances and how you expect the money to be used by your beneficiaries.
You might consider using life assurance to cover your estate’s Inheritance Tax bill
After you pass away, your beneficiaries will typically have to pay some or all of the IHT due on your estate within six months – before any inheritance is received through probate.
So, you might consider taking out life assurance to help ensure your loved ones can pay the tax bill without being out of pocket or facing interest charges for late payment.
In some cases, you might opt to take out enough cover to fund your estate’s total IHT liability. Alternatively, if you have given a non-exempt financial gift, you might wish to cover the potential IHT bill that the gift could be subject to if you pass away within seven years.
That said, it’s important to remember that if your life assurance is not placed in trust, the payout will usually be included in your estate. Not only does this mean the value could be taxed, but the funds generally won’t be released until after the IHT bill is paid – meaning your beneficiaries won’t be able to use the payout to cover the bill.
Placing life assurance in trust could help your beneficiaries pay less Inheritance Tax
When life assurance is placed in trust, it will generally be paid out directly to your beneficiaries, rather than to your estate.
As a result, its value typically won’t be included in your estate for IHT purposes. Additionally, payment can often be made outside of probate, generally reducing the amount of time they need to wait to receive the money.
In general, there are two types of trusts that can be used for your life assurance.
Bare trusts
Also known as “absolute trusts”, bare trusts assign specific beneficiaries whose entitlement usually cannot be changed. They are typically granted an absolute right to the cover value, meaning it is treated as belonging to them before you have passed away.
Discretionary trusts
Alternatively, you can assign potential beneficiaries using a discretionary trust. In this case, you choose a trustee to manage the funds at their discretion, according to the wishes outlined in your will.
It can be very difficult – or even impossible – to change the fundamental arrangements of a trust once it has been set up. So, it could be worth consulting with a financial planner to help you choose the most suitable trust for your circumstances and draw up a trust deed detailing who should receive the assurance payment, how, and when.
Your life assurance could still be subject to Inheritance Tax, even if placed in trust
In some circumstances, the value of your life assurance may still be included in your estate for IHT purposes.
For example, if you die within seven years of placing your life assurance in trust, the value may be included in your estate. In effect, this could result in a larger portion of your estate being pushed over the £325,000 (2025/26) nil-rate band and subject to IHT.
The rules for IHT and trusts are complex. As such, it could be worth seeking advice from a financial planner to help reduce the likelihood of your assurance being subject to IHT.
It’s often worth including life assurance in a comprehensive financial plan
While life assurance can offer a range of benefits, it’s important to ensure you choose arrangements that meet your needs and are suitable for your circumstances.
The cover value usually cannot be extracted until after you pass away or are diagnosed with a terminal illness. Additionally, if you stop making payments, you will no longer be covered.
What’s more, it’s important to ensure your premiums are affordable. Otherwise, if your financial circumstances change, such as during retirement, you could find yourself unable to access the funds you need or unable to continue your cover.
Additionally, while the ABI reports that 96.5% of life assurance claims were paid in 2024, it’s often vital you provide accurate, detailed information when setting up your arrangements. If key information is missing or misrepresented, you could run the risk of the insurer not paying out after you pass away.
By including life assurance in a comprehensive financial plan, you can help ensure that your premiums align with your expected income, while coordinating your arrangements in line with your wider estate plan.
Get in touch
Our financial planners can help you find a life assurance arrangement that works for your needs. By taking the time to understand your financial circumstances and estate planning priorities, we could help you mitigate your estate’s IHT bill through life assurance.
Contact us by emailing enquiries@metiswealth.co.uk or calling 0345 450 5670 to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
Note that life assurance and financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
The Financial Conduct Authority does not regulate estate planning, tax planning, or will writing.