Life Insurance in Trust UK: Write Your Policy in Trust to Save Inheritance Tax (2026)
Most people hold life insurance outside a trust — meaning the proceeds form part of the estate and face 40% IHT on death. Writing the policy in trust removes the proceeds from the estate entirely, saves IHT, and means the family receives the money within days — not months.
| Trust Type | How It Works | Flexibility | Beneficiary Age | IHT Periodic Charges? | Best For |
|---|---|---|---|---|---|
| Bare trust (absolute trust) | Policy proceeds paid absolutely to named beneficiaries; no trustee discretion once the deed is signed and named beneficiaries are set | NONE after creation — named beneficiaries receive funds absolutely; cannot redirect in future (e.g., if named beneficiary predeceases the policyholder) | Adult beneficiaries receive funds immediately; minor beneficiaries receive at 18 (age of majority); trustee manages funds until then | NONE — a bare trust is NOT relevant property (the beneficiary is absolutely entitled to their share); no 10-yr anniversary charge; no exit charge | Simple, settled arrangements where beneficiaries are clear and unlikely to change (e.g., spouse and adult children; two named adult children equally). Cheapest and simplest option |
| Discretionary trust | Policy proceeds paid to trustees who decide how/when to distribute among a class of potential beneficiaries; no fixed shares until trustees make an appointment | HIGH — trustees can take account of changing circumstances (new beneficiaries; changed financial needs; tax position of different family members at the time of payout); can appoint new beneficiaries by deed | No automatic age entitlement; trustees distribute when they consider appropriate; can hold funds for minor children indefinitely until trustees decide to distribute | YES — s64 IHTA: 10-yr anniversary periodic charge (up to 6% of the trust value above the NRB at each 10-yr anniversary of the policy's placement into trust). Exit charges (s65 IHTA) on distributions. For most term policies that pay out on death: the trust ceases once funds are distributed; periodic charges only apply if the trust continues for 10+ years holding the policy proceeds | Blended families; uncertainty about future circumstances; where children are likely to include minors who need funds held for them; where tax position of beneficiaries at time of payout may vary |
| Flexible / flexi trust | Named default beneficiaries (usually spouse/children); trustees have power to change beneficiaries by deed before a 'specified event' (usually the policyholder's death); hybrid of bare and discretionary | MODERATE — default beneficiaries can be changed before death; after death and once specified event occurs, beneficiaries are fixed | Default beneficiaries receive at 18 or as specified; trustees can appoint to adult beneficiaries earlier if they exercise their powers | Usually: minimal — the flexible trust is typically NOT relevant property while the policyholder is alive and the default beneficiaries are entitled to the benefit absolutely on death; confirm with the insurer's trust deed wording | Families where the likely beneficiaries are known but circumstances might change before death; common for married couples with children where the spouse is default beneficiary but trustees want to be able to adapt |
| Relevant life policy trust (RLP trust) | A specific trust structure for relevant life policies — employer-paid term assurance for employees; the trust is a 'discretionary trust' but with specific HMRC requirements for relevant life policies to qualify for favourable tax treatment | HIGH — discretionary; trustees can distribute to any member of the class (typically employee's family and financial dependants) | Trustees decide; often used for minor children of the employee | Technically: periodic charges apply if the trust holds funds for 10+ years. In practice: most RLP trusts are wound up quickly after the policy pays out on death, so periodic charges rarely arise | Business owners and senior employees: employer pays the premium; premiums are a business expense (corporation tax deductible); NOT a P11D employee benefit; proceeds outside the employee's estate. Separate rules from personal life insurance trusts |
| Policy NOT in trust (the default — avoid where possible) | Policy proceeds paid to the deceased's estate on death; processed through the estate; included in the IHT estate | N/A — funds go to the estate and are distributed under the will or intestacy | N/A — estate distributed to beneficiaries under the will or intestacy | No trust charges — but the proceeds ARE subject to IHT at 40% on death (included in the taxable estate) | Not recommended for most life policies. May be acceptable if the deceased's estate is well below the combined NRB + RNRB threshold and no IHT would be due anyway (so inclusion in the estate has no IHT consequence). Also: if the deceased was the only beneficiary of the policy (unlikely) or if estate equalization was intended |
Life insurance trust UK 2026. NOT in trust: proceeds in deceased's estate; IHT at 40% on sum assured above available threshold. In trust: proceeds NOT in estate; no IHT on sum assured; bypasses probate (paid within days of death). Trust types: (1) Bare trust — absolutely entitled named beneficiaries; NOT relevant property (s58 IHTA — bare trust excluded); no periodic (s64 IHTA) or exit (s65 IHTA) charges; beneficiary entitled at 18; no flexibility post-creation. (2) Discretionary trust — trustees have discretion; relevant property; periodic charges (s64 IHTA 10yr anniversary; up to 6% above NRB); exit charges (s65 IHTA); flexible. (3) Flexible/flexi trust — default beneficiaries; power to change; usually minimal periodic charges. (4) RLP trust: Relevant Life Policy — employer-paid term assurance; corporation tax deductible premium; NOT P11D benefit; proceeds outside employee's estate. Assignment of existing policy: term assurance (negligible surrender value) — safe, minimal CLT; whole-of-life (high surrender value) — CLT at surrender value (s98 IHTA); 20% IHT if above NRB. DO NOT assign high-value whole-of-life without advice. GWR (s102 FA1986): life insurance trust does not create GWR (no benefit retained from policy during lifetime). DPS: trust proceeds bypass probate — insurer pays trust directly on death certificate; no IHT400/IHT421 required for trust payout.
Life Insurance in Trust: Complete IHT Guide
Why writing a life insurance policy in trust saves inheritance tax
By default, when a life insurance policy pays out on death, the proceeds are treated as part of the deceased's estate for inheritance tax purposes. If the estate is above the nil rate band threshold, those proceeds will incur IHT at 40%. Writing the policy in trust removes it from the estate entirely: the trust — not the individual — owns the policy; when the policy pays out on death, the proceeds go directly to the trust (and from there to the beneficiaries); they are not part of the deceased's estate; no IHT on the proceeds. Worked example: individual has a £500k life insurance policy (not in trust) and an estate of £325k (already at the NRB threshold). On death: estate = £325k own assets + £500k policy = £825k. Threshold (NRB + RNRB if applicable) = £500k. IHT = 40% × £325k = £130k. With policy in trust: estate = £325k (NRB + RNRB = £500k; IHT = £0). Trust: £500k paid directly to beneficiaries free of IHT. Saving: £130k (or up to £200k if only NRB available). Second benefit: the proceeds bypass probate. A trust pays out as soon as the death is registered and a death certificate is provided — typically within days. The family do not need to wait for IHT400 processing, IHT421, and the grant of probate (which together can take 6-12 months) before accessing the funds. The trust proceeds can be used to meet immediate costs — mortgage payments, rent, food, children's school fees — while the main estate is being administered.
How to write a life insurance policy in trust — practical steps
Writing a life insurance policy in trust is usually simple and free: (1) Choose the type of trust: bare trust (simple; absolute; named beneficiaries); discretionary trust (flexible; trustee discretion; potential periodic charges); flexible/flexi trust (default beneficiaries; power to change). Most people opt for the insurer's own standard trust deed (usually one of these three types). (2) Request the trust deed from the insurer: all major UK life insurers provide standard trust deeds free of charge — available via the insurer's website, by phone, or through an IFA. (3) Complete the trust deed: name the trustees (minimum two, or a trust corporation; the policyholder is typically one trustee; name a second trustee — another adult; the second trustee can be a spouse, adult child, or solicitor); name the beneficiaries (or the class of beneficiaries for a discretionary trust); sign the deed in front of a witness. (4) Submit to the insurer: submit the completed trust deed to the insurer who notes the trust on the policy record. The policy is now held in trust. (5) Keep the original trust deed safe: the trust deed is the legal document evidencing the trust. Keep it with the will and other important papers. Tell the trustees where it is. Timing: writing in trust at inception costs nothing and involves no IHT calculation issues. Assigning an existing policy into trust after it has built up value (particularly whole-of-life policies with significant surrender value) can trigger a chargeable lifetime transfer (CLT) — take advice before assigning an established whole-of-life policy. Term assurance with negligible surrender value: generally safe to assign at any time.
Bare trust vs discretionary trust — which to choose for a life policy
The choice between a bare trust and a discretionary trust for a life insurance policy turns on two main questions: (1) How certain are the beneficiaries? and (2) Do the periodic charge risks matter? Bare trust: the beneficiaries are named absolutely from day one. The trustee holds the funds for those specific named people and must pay them once entitled (on death of the policyholder; adult beneficiaries receive immediately; minor beneficiaries at 18). The bare trust is NOT subject to the IHT relevant property regime — no periodic charges, no exit charges. Simple, cheap, certain. The risk: if circumstances change — the named beneficiary predeceases the policyholder; divorce; new children born — the bare trust may not reflect the updated intentions and cannot be varied without the beneficiary's consent (once they are adult). Discretionary trust: the trustees have complete discretion over how and when to distribute the funds among a class of potential beneficiaries (typically named specifically and broadly — children, grandchildren, other dependants). More flexible: trustees can adapt to changed circumstances; include new family members; take account of each beneficiary's needs and tax position at the time of payout. IHT periodic charge exposure: technically, a discretionary trust holding a life insurance policy is relevant property. If the trust holds the policy for 10 years (e.g., a whole-of-life policy held in trust for decades), a periodic charge could arise on the 10-year anniversary. For term policies: most pay out before the 10-year point arrives (or the trust is wound up quickly after payout). For whole-of-life: the trust may exist for many decades; periodic charges are a real consideration. Practical guidance: for most families, a flexible trust or a discretionary trust from the insurer (designed to minimise periodic charge exposure through specific drafting — such as no value being held in the trust until the policy pays out) works well.
Writing an existing policy in trust — CLT risk for high-value whole-of-life policies
A term assurance policy (pure protection; no investment element; zero surrender value until a claim) can generally be assigned into trust at any time with minimal IHT risk — the value transferred into the trust (the surrender value) is negligible, so any CLT charge is minimal or nil. However: whole-of-life policies with a significant surrender value (investment-linked whole-of-life; guaranteed whole-of-life; universal life policies) may have built up substantial surrender values. When such a policy is assigned into a trust, the transfer is a chargeable lifetime transfer (CLT — s98 IHTA 1984; value = surrender value of the policy at the time of assignment). If the surrender value exceeds the available NRB (above the NRB cumulated with other CLTs in the preceding 7 years), IHT at 20% becomes due immediately on the assignment. Example: whole-of-life policy with surrender value of £500k; transferor's NRB unused (£325k); CLT = £500k; chargeable = £500k - £325k = £175k; IHT at 20% = £35k. This could be a significant unexpected cost. For established whole-of-life policies: always take advice before assigning into trust; consider whether the future IHT saving justifies the immediate CLT cost; consider a deed of variation approach if writing a new policy would be too expensive. For new policies: write in trust from day one — no CLT issue (the policy has no surrender value at inception).
Trust proceeds and estate IHT — funding the IHT bill
A life insurance policy held in trust pays out directly to the trust beneficiaries — NOT to the deceased's estate. This means the trust proceeds are NOT available to the executors to pay the IHT on the main estate (unless the trust deed specifically permits loans from the trust to the estate, or the trustees and executors are the same people and specialist advice has been taken). Some families structure their life insurance trust to allow the trustees to lend the proceeds to the estate interest-free — this gives the executors access to the trust funds to pay IHT, while the loan is later repaid to the trust from the estate proceeds post-probate. This requires the trust deed to permit loans, or the beneficiaries to consent to a loan to the estate. More commonly: the life insurance trust proceeds are intended for the family's immediate needs (mortgage payments, income replacement, children's costs) while the estate IHT is funded separately through the Direct Payment Scheme (DPS), the instalment option, or the executors' personal borrowing. The life insurance trust payout is NOT subject to IHT — it is a benefit to the family that sits alongside (and is separate from) the estate. This means a family can receive £500k from a life insurance trust within days of death (to meet immediate needs) while simultaneously waiting 6-12 months for the IHT400/IHT421/probate process to conclude on the main estate.
Frequently Asked Questions
Should I write my life insurance in trust to save inheritance tax?
Yes — writing a life insurance policy in trust is one of the simplest and most effective IHT planning steps available, and it is usually free. Without a trust: the policy proceeds are included in your estate on death and subject to IHT at 40%. On a £500k policy, that could mean £200k in IHT on the proceeds alone. In trust: the proceeds are paid directly to the trust on your death, bypassing your estate entirely — no IHT on the sum assured; proceeds bypass probate (paid within days instead of waiting 6-12 months for a grant of probate). Most insurers provide a free trust deed at the time the policy is taken out. The trust deed takes minutes to complete. It is one of the lowest-effort, highest-impact IHT planning steps available. If your policy is not in trust and your estate is likely to incur IHT, contact your insurer to arrange a trust today.
What type of trust should I use for my life insurance policy?
Three main options: (1) Bare trust (absolute trust): simplest; proceeds paid absolutely to named beneficiaries; no IHT periodic charges; no flexibility once signed (named beneficiaries cannot be changed without their consent once they are adults). Best for settled, certain arrangements (e.g., adult children named as fixed 50/50 beneficiaries). (2) Discretionary trust: flexible; trustees decide how to distribute among a class; can adapt to changed circumstances; periodic IHT charge applies in theory (s64 IHTA — 10yr anniversary; up to 6%) but rarely arises in practice for term policies. Best for families where circumstances may change; blended families; where children include minors. (3) Flexible / flexi trust: named default beneficiaries; trustees can change them by deed before death; hybrid of bare and discretionary. Most insurers provide one of these as a standard free trust deed. For most families, a flexible trust or discretionary trust from the insurer works well.
Does a life insurance trust avoid inheritance tax on the payout?
Yes — if the life insurance policy is correctly held in a valid trust and the trust is not included in the estate (e.g., it is not a GWR), the proceeds are NOT included in the deceased's IHT estate. The proceeds are paid to the trust (and from the trust to the beneficiaries) on death without IHT being applied to them. The key requirement: the trust must be a genuine trust (not a sham); the deceased must not have retained a benefit from the trust assets after placing the policy in trust (GWR rules — s102 FA1986 — apply to life policy trusts as to any other trust). For a life insurance policy where the policyholder has placed the policy in trust and has no benefit from the policy proceeds during their lifetime (they only die once), GWR is not typically an issue. No IHT on the trust proceeds. The proceeds also bypass probate — they are not frozen pending the grant and are paid directly by the insurer to the trustees within days of death (on production of a death certificate).
Can I put my existing life insurance policy in trust?
Yes — most existing life insurance policies can be assigned into trust. The process is the same as for a new policy: complete a trust deed from the insurer; name trustees and beneficiaries; submit to the insurer. TAX WARNING for whole-of-life policies: if the policy has a significant surrender value (which term assurance typically does not), assigning it into a trust is a chargeable lifetime transfer (CLT — s98 IHTA 1984). The value of the CLT is the surrender value of the policy at the time of assignment. If the surrender value exceeds the available NRB (£325k above other CLTs in the prior 7yr), IHT at 20% becomes due immediately on the excess. For term assurance (pure protection; negligible surrender value): assignment into trust carries minimal or no CLT risk and can be done at any time. Take specialist advice before assigning a whole-of-life policy with high surrender value.
Do life insurance trust proceeds bypass probate?
Yes — this is one of the most valuable benefits of writing a life insurance policy in trust, separate from the IHT saving. When a policy is in trust: the insurer pays the proceeds directly to the trustees on the policyholder's death (on production of a death certificate and claim form). The trustees can then distribute to the beneficiaries — typically within days of death. No grant of probate is needed; no IHT400 or IHT421; no months-long wait for HMRC processing. The family can access the trust funds immediately to cover urgent expenses — mortgage, rent, utilities, children's school fees, food — while the main estate (which requires probate and possibly IHT payment) is being administered over the following months. This 'cash at hand' function of the life insurance trust is valuable even for estates that have no IHT liability, as it provides immediate liquidity during the probate period.
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