Life Insurance and Inheritance Tax UK (2026): Is Your Policy in Your Estate?
Updated 13 May 2026 · 8 min read · England & Wales
A life insurance policy worth £500,000 could cost your family £200,000 in inheritance tax — just because it was not written in trust. This is one of the most avoidable IHT mistakes in estate planning, and one of the simplest to fix. Here is what you need to know.
When is life insurance subject to IHT?
| Policy type | In trust? | IHT on payout? |
|---|---|---|
| Term or whole-of-life policy — not in trust | No | Yes — forms part of estate, taxed at 40% above NRB |
| Term or whole-of-life policy — written in trust | Yes | No — outside estate, paid directly to beneficiaries |
| Employer death in service benefit | Discretionary trust (employer) | No — trustees pay at discretion; outside employee’s estate |
| Joint life first-death — payout to survivor | Not in trust | No IHT at first death (spouse exemption); included in survivor’s estate |
| Joint life second-death — not in trust | No | Yes — forms part of estate; no spouse exemption available |
Writing in trust: the fix
Placing a life insurance policy in trust removes the payout from the estate entirely. The policy is owned by the trustees on behalf of the beneficiaries — when the policyholder (life assured) dies, the proceeds go directly to the trust beneficiaries, bypassing the estate and probate entirely.
Benefits of writing in trust:
- No IHT on the payout — the proceeds are not an estate asset
- No probate delay — trustees can claim and distribute within days of the death certificate being issued
- Control over beneficiaries — you specify who benefits; the payout does not depend on your will or intestacy
- No cost at most insurers — trust forms are usually provided free of charge
Using life insurance to fund an IHT bill
A whole-of-life policy written in trust for the beneficiaries is a classic tool for funding an IHT liability. The payout arrives free of IHT (because it is in trust) and is used by the beneficiaries to pay HMRC — avoiding a forced sale of the estate’s assets.
Example: an estate worth £1.5 million faces an IHT bill of approximately £470,000 (after the nil rate band and residence nil rate band). A joint second-death whole-of-life policy written in trust for £470,000, with premiums funded from income (potentially qualifying under the normal expenditure out of income exemption), can fund the entire IHT bill. The beneficiaries receive the estate assets intact rather than having to sell the family home under time pressure.
Death in service and expressions of wishes
Most employer death in service schemes are already held in a discretionary trust — the payout is outside the employee’s estate and is not subject to IHT. But trustees pay at their discretion. To guide them, employees should complete an Expression of Wishes (nomination form) naming who they want to benefit. This is not legally binding but is followed by trustees in all but exceptional circumstances.
Update your expression of wishes whenever your personal circumstances change — divorce, remarriage, birth of a child, death of a named person. An outdated nomination means the payout may go to the wrong person.
Frequently asked questions
Is life insurance subject to inheritance tax in the UK?
It depends on whether the policy is written in trust. A life insurance policy NOT written in trust: when the policyholder dies, the payout goes to their estate and is included in the estate's value for IHT purposes. If the estate exceeds the nil rate band (£325,000), the payout is taxed at 40% along with everything else. A life insurance policy written in trust: the payout does NOT form part of the estate — it passes directly to the trust beneficiaries outside the IHT calculation. This is one of the most common and straightforward IHT planning steps available. Many insurers allow policies to be placed in trust for free using a standard trust deed, and doing so can save the beneficiaries thousands in IHT.
How do you write a life insurance policy in trust?
Most major life insurance providers (Aviva, Legal & General, Royal London, etc.) offer a trust deed specific to their policies, usually at no extra cost. The process: (1) Contact the insurer and request a trust form. (2) Complete the trust deed — you become the settlor/life assured, and appoint trustees (often your spouse/partner plus one other adult). (3) Name beneficiaries (the people who will receive the payout). (4) Sign the trust deed — it usually requires two witnesses. (5) Return to the insurer, who attaches it to the policy. The policy ownership transfers to the trustees. On death, the trustees can pay the proceeds directly to the beneficiaries without waiting for probate — usually within days of providing the death certificate. Writing in trust also avoids the delay of probate, which can take 6 months or more.
What is the inheritance tax treatment of death in service benefits?
Death in service (employer-provided life cover, typically 2–4× salary) is almost always written under a discretionary trust operated by the employer or its trustees. This means the payout does NOT form part of the deceased employee's estate for IHT purposes — the trustees pay it at their discretion to the employee's nominated beneficiaries. HMRC treats employer-provided death in service benefits in this way specifically because the employee has no legal entitlement to direct where the payment goes — the trustees have discretion. To ensure the money goes to the right people, employees should complete an Expression of Wishes (nomination form) with their employer's HR/pension team, updated whenever personal circumstances change.
Are joint life insurance policies subject to inheritance tax?
A joint life (first death) policy pays out on the first spouse's death. If the policy is not in trust, the payout goes to the survivor — which is covered by the spouse exemption, so no IHT arises at that point. However, if both die simultaneously or the surviving spouse dies soon after, the payout could form part of the survivor's estate and be taxed. A joint life policy written in trust avoids this risk. A joint life (second death) policy pays out only on the second spouse's death — at which point the spouse exemption is no longer available. IHT applies to the estate in the normal way. A second-death policy written in trust can fund the IHT bill directly from the trust proceeds without the beneficiaries having to sell assets.
Can life insurance be used to pay the inheritance tax bill?
Yes — this is one of the primary estate planning uses of life insurance. Strategy: take out a whole-of-life policy (or a term policy covering the expected exposure period), write it in trust for the beneficiaries, and the payout funds the IHT bill on death. The beneficiaries receive the insurance proceeds free of IHT (as the policy is in trust), and use the cash to pay HMRC the IHT due on the estate — avoiding the need to sell property or investments quickly. This approach is particularly useful for illiquid estates (property-heavy or business-owning). A key consideration: the premium itself must not reduce the donor's income below their standard of living — if it does, HMRC could argue the premium is a gift rather than normal expenditure.
What about policies already in the estate — can they be moved into trust?
An existing policy that is not in trust can usually be assigned into trust — but doing so is a potentially exempt transfer (PET) for IHT purposes, since the donor is giving up their right to the policy proceeds. The value of the PET is the open market value of the policy at the time of assignment (which for a whole-of-life policy can be significant). The 7-year rule then applies to this PET. For new policies, writing in trust from inception avoids this issue. For existing policies, take advice before assigning — the IHT on a large PET within 7 years could outweigh the benefit.
Protect your estate from IHT
Life insurance in trust is just one piece of estate planning. A well-drafted will coordinates your assets, trusts, and insurance to pass on as much as possible. WillSafe’s Essentials Bundle includes a will and LPA guidance.
Get the Essentials Bundle →Related guides
- How to write life insurance in trust — step by step
- Expression of wishes — pensions and death in service
- Normal expenditure out of income — funding premiums IHT-free
- How to reduce your inheritance tax bill
- Nil rate band UK — IHT thresholds explained