IHT and Death in Service Benefits: How Employer Life Cover Avoids Your Estate
Death in service lump sums from employer schemes are typically held on discretionary trust — putting them outside your estate and free of IHT entirely. The key is completing (and keeping current) an expression of wishes. Without one, the trustees may pay into your estate, triggering an IHT charge you never anticipated.
Key Points: Death in Service and IHT
Death in service is typically outside the estate
Most employer-sponsored group life (death in service) schemes are written as discretionary trusts under a master trust deed established by the employer or an insurance company. Because the benefit is held on trust — and the trustees exercise discretion over who receives it — the lump sum does not form part of the deceased's estate for IHT purposes. There is no deemed ownership by the deceased; the trustees are the legal owners. The result: a £200,000 death in service payment via a discretionary trust passes to the beneficiaries completely free of IHT, even if the deceased's total estate (including the payment) would otherwise far exceed the nil-rate band.
The expression of wishes is not binding — but is decisive in practice
The employee cannot dictate to the trustees who receives the death in service lump sum — the trustees have an absolute discretion. However, the employee can complete an 'expression of wishes' (also called a 'nomination of beneficiaries' form) that informs the trustees of their preferences. In practice, trustees almost always follow the expression of wishes unless there are exceptional circumstances (e.g. the named beneficiary has predeceased, there has been a family breakdown not yet updated in the form, or there is a creditor concern). The legal reason for the discretion — rather than a binding nomination — is to preserve the IHT-exempt status: if the employee could irrevocably direct the payment to a named beneficiary, it might be treated as a binding right within the estate. The discretionary trust structure and non-binding expression of wishes are therefore deliberately designed to keep the payment outside the estate.
If paid directly into the estate: IHT applies
Where a death in service scheme pays the lump sum directly into the deceased's estate — rather than via a discretionary trust — the payment forms part of the taxable estate and is subject to IHT. This can happen where: (a) the scheme is not written under a trust (unusual for modern employer schemes but possible for older or self-insured arrangements); (b) the trustees exercise their discretion to pay into the estate (they may do so if no expression of wishes has been completed and there are no obvious beneficiaries); or (c) the benefit has been assigned to the estate. The IHT on a large death in service payment that falls into the estate can be very significant — and can be avoided by ensuring the scheme is properly trust-wrapped and by completing an up-to-date expression of wishes.
Keeping the expression of wishes current is critical
An expression of wishes completed 10 years ago naming an ex-spouse or a deceased parent will not automatically be followed by the trustees — but it creates ambiguity and delay at the worst possible time for the family. The trustees are obliged to investigate the deceased's circumstances and identify the appropriate beneficiaries; without a current expression of wishes they must do this investigation without guidance, which takes time and can lead to outcomes the employee would not have wanted. Best practice: review and update the expression of wishes after every major life event — marriage, divorce, birth of children or grandchildren, death of a named beneficiary, or significant change in circumstances.
Interaction with pension death benefits
Pension death benefits (lump sums from defined contribution pension pots, or lump sum death in service from defined benefit pension schemes) are handled by the pension trustees under a very similar discretionary nomination mechanism — and are similarly outside the estate for IHT purposes (currently). From April 2027, HMRC has proposed (subject to legislation) bringing unspent pension pots and certain pension death benefits within the IHT charge — a significant change that will affect the planning position for pension wealth. Death in service group life payments (separate from the pension scheme) are generally expected to remain outside the estate under the existing discretionary trust mechanism. However, where death in service and pension death benefits are both available via the same scheme, the position should be checked carefully.
Frequently Asked Questions
Is a death in service payment always free of IHT?
Not always — but in the majority of cases, yes. Modern employer group life schemes are structured as discretionary trusts, meaning the lump sum is held and distributed by trustees rather than forming part of the employee's estate. Where the discretionary trust structure is in place and the payment is made to beneficiaries nominated in the expression of wishes (or chosen by the trustees in their discretion), the payment is outside the estate and free of IHT. The risk areas are: older schemes not written under trust; schemes where the trustees pay into the estate (usually because there is no expression of wishes and no identifiable beneficiaries outside the estate); and schemes where a binding irrevocable nomination has accidentally been made, which could potentially be treated as a right within the estate. Check with your employer's HR or pensions team which type of scheme is in place.
Does the death in service payment count towards the nil-rate band?
Where the payment is made via a discretionary trust and is outside the estate, it does not count towards the nil-rate band and does not use up any of the NRB available for the death estate. The NRB (£325,000 in 2026/27) applies only to the chargeable estate — which excludes properly structured discretionary trust death in service payments. This means the full NRB (plus any transferred NRB or RNRB) is available for the death estate, making the overall tax position significantly better than if the death in service payment had fallen within the estate.
Who should I name in my expression of wishes?
You can name any individual or combination of individuals — typically a spouse or civil partner, children, other family members, or close dependants. You can specify proportions (e.g. 50% to spouse, 25% to each child). You should not name a charity as the sole beneficiary unless your employer's scheme permits this — most schemes require payment to individuals. For minors who are named, the trustees will typically hold the lump sum on trust for them until they reach the specified age (often 18 or 25). The key practical advice: name the people you want to benefit, specify proportions if relevant, and review the form after every major life event. One form per employer — if you change jobs, complete a new form for the new employer's scheme immediately.
What happens if I don't complete an expression of wishes?
If you die without completing an expression of wishes, the trustees must use their discretion to decide who receives the lump sum. The trustees will investigate your circumstances — looking at any obvious dependants, the contents of your will, and any available evidence of your intentions. In many cases, the trustees will pay the lump sum to your estate (which then becomes taxable) or to your next of kin — which may not match your intentions, particularly if you are unmarried, separated, or in a blended family. The payment may also be delayed while the trustees investigate. Completing a current expression of wishes takes 5 minutes and ensures the trustees have clear guidance — and keeps the payment firmly outside the estate.
How does death in service interact with my will?
Death in service payments via a discretionary trust pass entirely outside your will — they are not governed by your will, and your executor has no control over them. Your will does not bind the trustees. This means: (1) if you want specific people to benefit from the death in service payment, you must name them in the expression of wishes, not your will; (2) if your will leaves everything to one beneficiary but your expression of wishes names different beneficiaries, both documents operate independently and neither overrides the other; (3) if the trustees exercise their discretion to pay into your estate, the payment then falls within your will (and within IHT). The will and the expression of wishes are separate documents covering different assets — keeping both current is essential.
Your Will and Your Expression of Wishes Work Together
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