Life Insurance and Inheritance Tax UK 2026: Writing Policies in Trust, Whole of Life, Joint Life Second Death, Relevant Life Plans, and the s11 IHTA Normal Expenditure Exemption
A life insurance policy NOT written in trust increases your IHT bill. The same policy IN trust pays out outside the estate, funds the IHT bill, and skips probate entirely — no extra cost, just a 30-minute trust form.
Write Your Existing Policy in Trust Today — Free, 30 Minutes, No Medical
If you have a life insurance policy NOT in trust: the proceeds go into your estate and are subject to 40% IHT. Contact your insurer for a trust nomination form. It is free, takes 30 minutes, and does not require new medical underwriting. This single action removes the policy proceeds from your IHT estate entirely.
| Policy Type | IHT Treatment | Trust / Planning Action |
|---|---|---|
| Life insurance policy NOT written in trust (common mistake) | The policy pays out TO THE ESTATE on death. The proceeds form part of the IHT estate — subject to IHT at 40% on the excess above the NRB/RNRB. Example: £500k WoL policy; estate already £1m above NRB → the additional £500k policy proceeds increase IHT by £200k (40% × £500k). The payout is also delayed by probate — the insurer will not pay until a grant of probate is obtained (typically 6-12 months after death). This means the family must fund the funeral, living expenses, and IHT with no access to the payout during probate. The fundamental error: buying a life insurance policy 'for IHT' and NOT writing it in trust means the policy itself creates additional IHT. | IMMEDIATE ACTION: if you have a life insurance policy that is NOT in trust, contact the insurer and complete a trust nomination form NOW. Most insurers provide a simple trust form (free). The trust form can be completed retrospectively — it does not require a new policy or new medical underwriting. A trust nomination overrides the default 'pay to estate' outcome. Time to complete: typically 30-60 minutes to fill in the trust form and sign with a witness. |
| Discretionary trust life insurance policy | Policy written in a discretionary trust at outset (or retrospectively via trust nomination). The trustees (typically: you + spouse/partner + an independent trustee or professional trustee) hold the policy on behalf of the beneficiaries named in the trust. On death: the insurer pays the proceeds to the trustees; the trustees distribute to beneficiaries at their discretion. The proceeds are OUTSIDE the estate — no IHT. IHT periodic charge risk: if the policy has a surrender value AND is a relevant property trust (discretionary), the surrender value may be subject to the 10-yr periodic charge (s64 IHTA). For TERM ASSURANCE (no surrender value): no relevant property to charge — no periodic charge. For WHOLE OF LIFE (with surrender value): the surrender value could be relevant property in the trust — specialist advice needed, though many WoL policies in discretionary trusts have surrender values below the NRB. | Discretionary trust advantages: flexible — trustees can decide to give more to one beneficiary (e.g., a child who has a greater financial need) vs a fixed beneficiary split; can add or vary beneficiaries in the trust deed. Limitation on changes: if the policy is in an ABSOLUTE trust, the beneficiaries cannot be changed — this is inflexible if family circumstances change. Most financial advisers recommend a DISCRETIONARY trust for life policies to retain flexibility. |
| Whole of Life (WoL) policy written in trust — IHT planning | A Whole of Life policy is guaranteed to pay out on death (no term expiry). This makes it the most effective life assurance tool for IHT planning: (1) calculate estimated IHT liability (estate value minus NRB/RNRB/BPR/APR reliefs × 40%); (2) take out a WoL policy for that amount (or a proportion); (3) write the policy in a discretionary trust (beneficiaries = children / grandchildren — those who will inherit the estate and face the IHT bill); (4) on death: insurer pays proceeds to the trust; trustees release funds to beneficiaries to pay the IHT without needing to wait for probate or sell estate assets. Premium calculation: WoL premiums are set at policy inception based on age and health. Premiums are fixed (reviewable policy) or level (guaranteed premium). s11 IHTA exemption: if premiums are paid regularly from income (habitual, not reducing standard of living): each premium payment is IHT-exempt under the normal income expenditure exemption (s11 IHTA) — no PET; no 7yr clock. | IHT-funded WoL calculation example: estate £2.5m (single, NRB £325k, RNRB £175k — no qualifying residential property for RNRB). Chargeable estate: £2.5m − £325k = £2.175m × 40% = £870k IHT. WoL policy for £870k written in discretionary trust for children: annual premiums (illustrative, age 65, non-smoker): ~£15,000-£25,000 pa. If premiums come from income (pension income, rental income etc.): s11 IHTA exemption applies; premiums are immediately IHT-exempt. Net benefit: on death the trust pays £870k IHT directly, leaving the entire estate intact for the family. |
| Joint life second death policy (survivorship policy) | A single policy on the lives of TWO people (married couple / civil partners); pays out on the SECOND death. The spousal exemption (s18 IHTA) means IHT is deferred until the second death — the estate passes IHT-free to the surviving spouse. At the second death: the combined estate (including assets inherited from the first death) is subject to IHT. The second-death policy provides the cash to pay this IHT. Written in a discretionary trust for children/grandchildren: proceeds are outside the second estate (the survivors' combined estate) — no IHT on the policy proceeds. Premium advantage: joint life second death premiums are LOWER than two separate single-life WoL policies (because two lives must both end before the payout — statistically longer average term). For couples with large combined estates and the s18 spousal exemption in play: joint life second death is the standard recommendation. | Joint life second death trust: discretionary trust with children/grandchildren as beneficiaries. The trustees pay the proceeds directly to the executors to fund IHT, or hold the proceeds in trust for the beneficiaries to enable them to pay the IHT (or to take a low-interest loan to the estate to fund IHT — 'trustee loan arrangement'). Trustee loan arrangement: the trust trustees loan the IHT amount to the estate at commercial interest; the estate pays IHT with the loan; the estate repays the loan over time from estate assets as they are sold or realised. Advantage of trustee loan: the trust retains ownership of the assets (the loan is repayable); the beneficiaries receive both the estate assets AND the loan repayments over time. |
| Relevant Life Plan (employer-paid — for company directors and senior employees) | A Relevant Life Plan (RLP) is a death-in-service life assurance policy taken out by an EMPLOYER on the life of an EMPLOYEE (including company directors). The policy is held under an employer-sponsored discretionary trust for the employee's family/dependants. IHT position: the RLP proceeds are NOT an asset of the employee's estate — they are held by the trust and paid to the beneficiaries outside the estate. No IHT. BENEFIT IN KIND: no income tax or NI charge on the employee — the policy does not count as a P11D benefit in kind (provided the policy is whole-of-life and the scheme is approved structure). CORPORATION TAX: the employer's premium payments are corporation tax deductible (as a business expense — not a benefit in kind for the employee). For company directors: an RLP is dramatically more efficient than a personal WoL policy — the premiums are paid from pre-tax company profit; no personal income tax or NI; the death benefit is outside the director's estate. A £500k RLP with £8,000 pa premiums paid by the company: the effective cost to the director (accounting for the corporation tax saving) is ~£6,000-£6,500 (depending on corporation tax rate); a personal policy for the same amount would cost £8,000 from post-tax income (potentially £13,000+ gross earnings to net £8,000 after 40% tax and NI). | RLP maximum benefit: typically a multiple of salary (e.g., 4× salary) — though HMRC has not set a formal cap. For company directors with small salaries and large dividends: the multiple-of-salary calculation can be low; an independent financial adviser can structure the arrangement to maximise the benefit. RLP cannot be for shareholders who are not employees. It must be a genuine employment relationship. Annual review: as the director's estate grows, revisit whether the RLP provides enough cover — the estimated IHT bill should be recalculated annually. |
Life insurance IHT UK 2026. General law: a life insurance policy is a chose in action (intangible property); on death, if not in trust, the policy forms part of the estate (s1 Administration of Estates Act 1925); IHT applies as an estate asset. Trust nomination: under the Married Women's Property Act 1882 (s11 MWPA) — MWP trust; older form; policy written for benefit of spouse and/or children; simple; no flexibility; no trustees (the benefit goes automatically); only for married/CP couples. Modern trust forms: most insurers now use a discretionary deed of trust rather than MWP; discretionary trusts are more flexible (can add beneficiaries; trustees can respond to changed circumstances). Relevant property trust concerns: s58-68 IHTA 1984 — relevant property regime (discretionary trusts); life policy in a relevant property trust = surrender value is relevant property; 10-yr periodic charge if surrender value exceeds NRB (s64 IHTA). Term assurance: no surrender value — zero relevant property; no 10yr charge. Whole of life with surrender value: surrender value may be > NRB in later years — periodic charge on the surrender value above NRB × 6% per decade. Mitigation: write in a discretionary trust where beneficiaries are individuals (not the estate); consider whether a reversionary interest exemption applies (s48 IHTA). s11 IHTA 1984: excluded dispositions — payment of premium on a life insurance policy on the donor's own life for the benefit of dependants (or under MWPA trust) if: (a) it is made as part of normal expenditure; (b) taking one year with another, was made out of income; (c) after allowing for all such transfers, the transferor was left with sufficient income to maintain his usual standard of living. HMRC IHTM14231: normal income expenditure exemption. IHT403 Gifts and other transfers of value: the executors use this form to claim s11 IHTA exemption on death; annex for regular payments. Premiums must be regular and habitual (not one-off); evidence: bank statements showing regular payments; statement from the deceased (if prepared in advance); financial accounts showing income vs expenditure. Relevant Life Plan: Income Tax (Earnings and Pensions) Act 2003 (ITEPA) s393A-393B: exemptions from income tax for relevant life policy benefit; no P11D reporting; no NI. Corporation tax: premiums deductible if the policy is for employees/directors and meets the wholly and exclusively purpose test (s54 CTA 2009). FA 2023: no changes to RLP regime. HMRC manual: IHTM20000-20182 (life policies); IHTM21000-21082 (settlements — life policies in trust). Back-to-back arrangement: a purchased life annuity + WoL policy in trust; the annuity income funds the WoL premiums; the WoL provides the IHT payment. The annuity capital is spent (removed from the estate); the WoL provides the replacement IHT cover. Complex arrangement requiring specialist IFP advice; HMRC may challenge if the sole purpose is IHT avoidance (GAAR considerations apply if the arrangement has no commercial purpose other than IHT saving). Discount gift trust (DGT): a split of the invested fund into an immediate entitlement (the 'discount' — based on actuarial valuation of retained income) and a gift to the trust; the discount is immediately exempt; the balance is a CLT or PET. A DGT with a life assurance element: the retained right is a deferred annuity under a life insurance policy; complicated regulated product; requires FCA-authorised specialist IFA.
Frequently Asked Questions
Should I write my life insurance in trust for IHT?
Yes — almost always. A life insurance policy NOT written in trust pays out to your estate and is subject to IHT at 40% (like all other estate assets above the NRB). A policy written in a discretionary trust pays out directly to the trust beneficiaries (your children, grandchildren etc.) completely outside the estate — no IHT on the proceeds. The trust also avoids probate delay: the insurer pays the trustees (no grant of probate required), so the family can receive the money within weeks of death. If you have an existing life policy not in trust: contact your insurer and request a trust nomination form — this can be done retrospectively and takes 30-60 minutes. There is no additional premium for writing a policy in trust. This is one of the simplest and most impactful IHT planning steps.
How does whole of life insurance help with inheritance tax?
A Whole of Life (WoL) policy is guaranteed to pay out on death (unlike term insurance, which only pays if you die within a fixed term). For IHT planning: (1) calculate your estimated IHT bill (estate value minus NRB/RNRB × 40%); (2) take out a WoL policy for that amount (or a proportion); (3) write the policy in a discretionary trust for your beneficiaries; (4) when you die: the insurer pays the sum assured to the trust (outside your estate — no IHT on it); the trustees distribute to your beneficiaries who use the funds to pay the IHT bill. The premiums may qualify for the normal income expenditure exemption (s11 IHTA) — if paid regularly from income and not reducing your standard of living, each premium is immediately IHT-exempt (no 7yr clock). WoL is the most reliable IHT planning tool for estates with illiquid assets (property) where the family would otherwise need to sell assets to pay IHT.
What is a joint life second death life insurance policy for IHT?
A joint life second death (or 'survivorship') policy covers two lives (typically married couples) and pays out on the SECOND death. Because the s18 IHTA spousal/CP exemption means IHT is deferred until the second spouse/CP dies (all assets can pass to the surviving spouse IHT-free), the IHT liability only arises at the second death. A joint life second death policy written in a discretionary trust for children/grandchildren: pays out exactly when the IHT bill arises (the second death); the proceeds are outside both estates (held in the trust); the proceeds are available to the beneficiaries to pay the IHT without selling estate assets. Joint life second death premiums are lower than two separate single-life policies because the insurer is paying out only once (on the later of the two deaths — statistically a longer expected term). This is the standard IHT mitigation tool for married couples with combined estates above the joint NRB+RNRB threshold.
What is a relevant life plan and how does it save IHT?
A Relevant Life Plan (RLP) is a death-in-service life assurance policy taken out by an EMPLOYER on an EMPLOYEE's (or director's) life, held under an employer-sponsored discretionary trust for the employee's family. IHT benefits: the RLP proceeds are NOT an asset of the employee/director's estate — they are held in trust and paid to the beneficiaries completely outside the estate; no IHT. For company directors: an RLP replaces a personal whole-of-life policy but is funded by the company from pre-tax profit: (1) no income tax or NI on the employee (not a P11D benefit in kind); (2) employer's premiums are corporation tax deductible; (3) the death benefit is outside the director's estate. This makes the RLP significantly more efficient than a personal policy: £8,000 RLP premium = £8,000 pre-tax cost to the company (after CT deduction: ~£6,500 net); the same cover via a personal policy would require ~£13,000+ gross earnings at 40% income tax + NI. The trust ensures the proceeds are outside the estate.
Are life insurance premiums exempt from inheritance tax under s11 IHTA?
Yes — regular life insurance premiums can qualify for the normal income expenditure exemption under s11 IHTA 1984. The conditions: (1) REGULAR: the payments must be habitual (same amount, same frequency — e.g., monthly or annual direct debit); (2) FROM INCOME: the premiums must come from income (salary, pension, rental income, dividends) — not from capital or asset sales; (3) NOT REDUCING STANDARD OF LIVING: after paying the premiums, the payer must still have enough income to maintain their normal lifestyle (they are not dipping into capital to sustain themselves). If all three conditions are met: each premium payment is immediately IHT-exempt — no PET; no 7yr clock; no clawback. HMRC Form IHT403 is used by executors to claim the exemption on death. Practical application: if you are taking out a whole-of-life policy to fund an IHT liability, ensure the premiums are paid from income (not capital) and document the income/expenditure position annually to evidence the s11 claim for executors.
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