Life Insurance and Inheritance Tax UK: Is a Life Insurance Payout Subject to IHT? (2026)
A life insurance payout is subject to 40% IHT if it pays into the estate — but is completely outside the IHT estate if the policy is written in trust. Writing in trust is free, takes 30 minutes, and means beneficiaries receive the money weeks faster without waiting for probate. Employer death-in-service lump sums are usually already in trust.
| Situation | IHT? | Probate needed? | Action |
|---|---|---|---|
| Life policy — no trust; pays into estate | Yes — at 40% above NRB | Yes — waits for probate | Write in trust immediately |
| Life policy — written in discretionary trust | No — outside estate | No — direct to trustees | Maintain expression of wishes; review sum assured |
| Life policy — written in bare trust (named beneficiaries) | No — outside estate | No — direct to beneficiaries | Review if beneficiaries change |
| Employer death-in-service (master discretionary trust) | No — held in employer trust | No — trustees distribute | Update expression of wishes annually |
| JLSD whole-of-life — NOT in trust | Yes — payout adds to second death estate | Yes — adds to probate estate | Write in trust; most providers offer free forms |
| JLSD whole-of-life — written in trust | No — outside estate; available to fund IHT bill | No — direct to trust beneficiaries | Review sum assured vs projected IHT liability; index-link if possible |
| Existing policy — written in trust (no surrender value) | No PET on assignment; outside estate from assignment date | No | Assign now; most insurers offer free assignment into trust |
s5 IHTA 1984: estate includes all property to which deceased was beneficially entitled at death — includes life insurance proceeds paid to estate. Policy in trust: outside s5 IHTA — trust property, not personal property of the deceased. s21 IHTA 1984: normal expenditure from income (uncapped; immediately exempt; regular premium payments from surplus income may qualify). s226 IHTA 1984: IHT due 6 months from month of death — JLSD trust payouts available immediately to fund this. Discretionary trust periodic charge (s64 IHTA): usually nil for in-force life policies (no surrender value = no relevant property). Employer death-in-service: master discretionary trust — outside estate; trustees distribute per expression of wishes.
Life Insurance and IHT: Complete Guide
Is a life insurance payout subject to inheritance tax?
It depends on whether the policy is written in trust. If the life insurance policy pays into the deceased's estate (i.e. there is no trust, and the payout forms part of the estate under the will or intestacy): YES — the payout is subject to IHT at 40% on the value above the NRB threshold (s5 IHTA 1984 — the estate includes all property to which the deceased was beneficially entitled at the time of death, including life insurance proceeds directed to the estate). If the policy is written in trust (a separate legal arrangement where trustees hold the policy and distribute the proceeds directly to beneficiaries): NO — the proceeds pass outside the estate; no IHT; no probate required; beneficiaries receive the money faster. The trust holds the policy, not the deceased. On death, the trustees claim the payout and distribute it to the beneficiaries named in the trust deed — completely separate from the estate administration. This is one of the simplest, highest-impact changes any life insurance holder can make: writing the policy in trust is free (the insurer provides standard trust forms), takes around 30 minutes, and immediately removes the payout from the IHT estate.
How does writing a life policy in trust work?
Writing a life insurance policy in trust involves assigning the policy to a trust deed, naming trustees (usually the spouse/civil partner plus one or two others, or a professional trustee) and beneficiaries. From the date the trust is established: (1) the policy is legally owned by the trustees, not the deceased; (2) the insurance company pays the claim to the trustees on death; (3) the trustees distribute the proceeds to the beneficiaries without going through probate. The key documents: the trust deed (provided by the insurer — most major insurers offer standard forms); the policy assignment (transferring the policy into trust); the named beneficiaries and trustees. For term assurance (pays on death during the term): write in trust immediately — the proceeds are most needed by the family at that point and going through probate delays payment by months. For whole of life policies: same principle applies — write in trust to avoid the payout being in the estate. Changing an existing policy into trust: it is possible to assign an existing policy into trust (not just new policies). This may be a PET for IHT purposes if there is a surrender value at the time of assignment (the surrender value is the gift element). For policies with no surrender value (e.g. most term policies), no PET arises on writing in trust.
Bare trust vs discretionary trust for life insurance
For life insurance policies, there are two main trust types: (1) Bare trust (absolute trust): the beneficiaries are named and fixed at the outset. The trustees have no discretion — they must pay the proceeds to the named beneficiaries when the claim is paid. Best for: simple situations where the beneficiaries are known and unlikely to change (e.g. policy for the benefit of adult children). Advantage: simple administration; no periodic charges; no exit charges. Disadvantage: beneficiaries are fixed — if a named beneficiary dies before the policyholder, or circumstances change, the trust cannot be varied; (2) Discretionary trust: the trustees can choose who receives the proceeds from a class of beneficiaries (e.g. 'the spouse and children of the settlor'). This is flexible — the trustees can take account of changing circumstances. For life insurance policies held in a discretionary trust: most insurer-standard discretionary trust forms are structured so that the trust holds an insurance policy and is not subject to the 10-year periodic charge (s64 IHTA 1984) or exit charge (s65 IHTA 1984) while the policy is in-force. This is because the policy has no 'relevant property' value while in-force (there is no surrender value above a nominal amount in most term policies). For whole of life policies with a significant surrender value: periodic and exit charges may apply — check with the insurer and take advice. Most people choose a discretionary trust for a life insurance policy because of the flexibility.
Employer death-in-service lump sums and IHT
Employer death-in-service benefits (typically 3x or 4x salary lump sums paid by the employer on the death of an employee in service) are usually held in a master discretionary trust by the employer or pension scheme trustees. This means: (1) the lump sum does not form part of the employee's estate — it is outside IHT; (2) the employees typically complete an 'expression of wishes' (not a binding nomination) telling the trustees who they would like to receive the benefit; (3) the trustees exercise their discretion and distribute to the nominated persons — typically the family. Because it is a discretionary trust, the lump sum passes free of IHT and probate, and HMRC does not have a claim on it. Employees should keep their expression of wishes form up to date (particularly after marriage, divorce, or birth of children) — this is not binding on the trustees but is the most important guidance they have. If a nomination is structured as a binding nomination (some older schemes): this may mean the beneficiary is treated as receiving the money directly from the estate, potentially making it subject to IHT and removing the discretionary protection. Check the scheme terms.
Joint life second death policy for IHT planning
A joint life second death (JLSD) whole of life policy is specifically designed to fund an IHT liability: it pays a lump sum on the death of the second of two people (typically a married couple). The timing is intended to match when the IHT liability arises: on the first death, the spousal exemption (s18 IHTA 1984) usually means no IHT; on the second death, the full estate of both spouses is taxable above the combined NRB threshold (£650,000) or NRB plus RNRB threshold (£1,000,000). A JLSD policy written in trust provides the beneficiaries (children) with an immediate lump sum to pay the IHT bill, before probate is granted, without needing to sell assets. Key planning points: (1) The JLSD policy must be written in a discretionary or bare trust — if it is not in trust, the payout itself enters the second death's estate and adds to the IHT problem; (2) The policy's sum assured should be linked to the projected IHT liability — as the estate grows (property prices rise), the sum assured may become inadequate; review regularly; (3) JLSD premiums are paid out of current income — regular premium payments from surplus income may qualify as normal expenditure from income (s21 IHTA 1984 — uncapped; immediately IHT-exempt) if they meet the conditions (regular, surplus income after expenditure, from income not capital); (4) Budget 2024: pensions entering the IHT estate from April 2027 will increase the projected IHT liability — JLSD policies may need recalibrating to cover the additional liability.
Frequently Asked Questions
Is a life insurance payout subject to inheritance tax in the UK?
It depends on whether the policy is written in trust. If the policy pays into the estate (no trust): yes, the payout is in the IHT estate at 40% above the NRB threshold (s5 IHTA 1984). If the policy is written in trust (discretionary or bare trust): no — the payout bypasses the estate entirely; no IHT; no probate needed; beneficiaries receive the money weeks faster. Writing a life policy in trust is free (insurers provide standard forms), takes around 30 minutes, and is one of the simplest IHT planning actions available.
How do I write my life insurance in trust to avoid IHT?
Contact your insurer and ask for their standard trust form. Most major UK insurers (Aviva, Legal & General, Royal London, Zurich, Vitality, etc.) provide free discretionary or bare trust forms. You complete the form naming trustees (usually your spouse/partner plus one or two others) and beneficiaries (or a class — 'my children'). Sign and return to the insurer. The policy is then held in trust and the payout goes directly to the trustees on death, outside the estate. For new policies: set up the trust at the same time as the policy. For existing policies: you can assign the policy into trust — usually no IHT consequences if the policy has no surrender value.
Does employer life insurance (death-in-service) count for inheritance tax?
Usually no — most employer death-in-service schemes are held in a master discretionary trust by the employer or pension scheme trustees. The lump sum is outside the employee's estate, passes free of IHT and probate, and the trustees distribute it to the family based on the employee's expression of wishes. Employees should keep their expression of wishes form up to date. In rare cases where the benefit is structured as a binding nomination (not a discretionary trust), the payout may be treated as part of the estate — check the scheme documentation.
What is a joint life second death policy and how does it help with IHT?
A joint life second death (JLSD) whole of life policy pays a lump sum on the death of the second of two lives (typically a married couple). It is designed to fund the IHT bill that arises on the second death, when the full combined estate becomes taxable. The policy must be written in trust (if not, the payout itself enters the second estate and worsens the IHT problem). The trust beneficiaries (children) receive the payout immediately on the second death — before probate — and use it to pay the IHT bill to HMRC within the 6-month deadline (s226 IHTA 1984). Premiums paid from surplus income may qualify as normal expenditure from income (s21 IHTA — uncapped IHT exemption).
Can life insurance premiums be paid IHT-free?
Regular life insurance premiums paid from surplus income can qualify as normal expenditure from income (s21 IHTA 1984) — an uncapped, immediately IHT-free exemption. The conditions: (1) the gifts (premium payments) must be regular (a pattern of similar payments); (2) they must be made from income (not from capital); (3) the donor must be left with enough income to maintain their usual standard of living after the payments. If all three conditions are met, the premium payments are immediately outside the IHT estate with no 7-year clock. This is particularly valuable for JLSD whole-of-life premiums — the premiums are gifted outside the estate; the policy payout on second death (in trust) is also outside the estate.
Will + Life Insurance in Trust = Complete IHT Protection
Writing your life insurance in trust removes the payout from the IHT estate. A well-drafted will claims the RNRB, directs the home to children, and ensures the estate itself is as tax-efficient as possible. Together, these two steps cover both the immediate family income need and the long-term IHT position. WillSafe will kits from £39.99.
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