By Laura Miller
Copyright moneyweek
Families hunting for ways to stave off inheritance tax bills are sending life insurance sales soaring – but lawyers are warning the payment strategy could be worthless unless structured the right way.
With more estates becoming liable for inheritance tax (IHT), the data suggested individuals have been increasingly turning to life insurance to shield their families from future inheritance tax bills – so-called ‘inheritance tax insurance’. The idea is the payout from the insurance policy will cover the cost of any future IHT bill after the policyholder dies.
The total value of life insurance sales jumped by 18% to £447m in the 12 months to 31 March 2025, up from £378m in 2023/24, according to Financial Conduct Authority (FCA) data.
The surge follows the widening in scope of assets subject to inheritance tax announced at the 2024 Budget that will see more estates owing IHT for the first time.
From April 2027, as a result of the changes, any unused pensions will be included in IHT calculations and so could potentially be taxed up to 40%. The value of these pensions will push many families above the £325,000 IHT nil-rate band.
Inheritance tax will also be due on agricultural property and business property – such as family-owned businesses and farms or AIM shares – from April 2026, taxed at a rate of up to 20%.
However TWM Solicitors, a private wealth and family law firm that obtained the FCA life insurance data via a Freedom of Information (FOI) request, warned life insurance policies must be held in trust to avoid costly tax and probate delays.
Duncan Mitchell-Innes, partner and deputy head of private client at TWM Solicitors, said: “Holding life insurance in specific types of trusts can exempt it from IHT, making it a powerful estate-planning tool. Life insurance payouts are also free from income and capital gains tax.”
Writing a life insurance policy in trust
Most people don’t realise that if life insurance isn’t written into trust, it forms part of the estate – potentially triggering 40% inheritance tax and delays through probate.
With a life insurance policy written in trust, the proceeds of the policy can be paid directly to your intended beneficiaries, rather than to your legal estate. This means there is no IHT to pay on the payout.
Mitchell-Innes said: “Life insurance can be a powerful estate-planning tool, but only when structured correctly. If not held in trust, the policy may be taxed for IHT and tied up in probate, defeating its purpose.”
“With the recent changes to IHT, life insurance remains one of the few effective tools for families to protect their estates. However, it is crucial to structure these policies correctly to maximise their benefits.”
Most providers have an online trust section on the application so it’s an easy process and secures the money going to the right person(s).
Should you take out life insurance to pay an IHT bill?
Financial advisers have told MoneyWeek they have seen a spike in enquiries about whole of life insurance – so-called ‘inheritance tax insurance’ – since Autumn Budget 2024, as a way to pay for an expected new wave of inheritance tax bills.
Whole of life insurance, also known as life assurance, is a type of life insurance policy that provides lifelong coverage. It pays out a lump sum to your beneficiaries whenever you die, as long as premiums are maintained – but these can be costly.
To take out a whole of life policy at age 60 to cover the cost of a £300,000 inheritance tax bill – the roughly projected average for London in the 2026/27 tax year – would cost a non-smoker around £1,000 a month, or £12,000 a year, according to CIExpert, an insurance specialist financial adviser.
Mitchell-Innes said: “Life insurance is one of the few routes left and we have seen an increased number of enquiries for advice in this area.”
“Other than gifting assets, there are fewer and fewer ways to reduce your family’s IHT bill.”
We look at gifting to avoid inheritance tax and other ways to reduce your inheritance tax bill in separate articles.
