Avoiding Inheritance Tax with Life Insurance

Can it be done?

author image - cai

By Cai Bradley

on Monday 9 September 2019

Inheritance tax paperwork next to calculator

Your life insurance provides a lump-sum payout to beneficiaries when you pass away, but the amount your loved ones receive could be impacted greatly by inheritance tax.

But what if there was a way to avoid inheritance tax, legally? Well, there is! Here’s how…

What is inheritance tax?

Your estate – the assets you leave behind when you pass away – is subject to inheritance tax (IHT) at a rate of 40% on anything that surpasses the £325,000 inheritance tax threshold – also known as the IHT nil-rate band. That’s a £70,000 tax bill if your estate totals £500,000.

That threshold might seem a lot, but when you calculate the value of your life insurance, home, cars, and any other substantial assets, it’s not surprising that the estate of many people in the UK is unfortunately hit with the harsh 40% inheritance tax charge before it reaches their loved ones.

But if you set up your life insurance in a certain way, you could help your beneficiaries to avoid paying any inheritance tax whatsoever on the estate you leave to them, thus giving your loved ones the full payout that you intended, rather than a reduced amount.

How to avoid inheritance tax

The best way to avoid the 40% inheritance tax is by writing your life insurance in trust. 

A trust is a way of managing your assets and setting them aside for specific people (known as beneficiaries). The asset(s) within the trust are managed by what’s known as a ‘trustee’ (a friend, family member or solicitor, for example) until it is ready to be released to the beneficiary at the intended time.

For example, your solicitor could be the trustee of your life insurance in trust until you pass away, with it then going straight to the beneficiaries when the time comes.

How does inheritance tax come into this? Well, when you put your assets into trust, they are not taxed as part of your estate, meaning that the total value of your assets is then unlikely to surpass the IHT threshold and will not be subject to the 40% inheritance tax.

Read more in our full guide: What does it mean to put life insurance in trust?  

Write your life insurance into trust = avoid 40% inheritance tax!

Bypass probate

Putting your life insurance into a trust also means that it reaches your loved ones and the intended beneficiaries far quicker than it would otherwise, as it bypasses probate – which is the legal process to administer the estate of the deceased.

Unite Life’s advice on putting life insurance in trust

Whether you have a whole of life policy or term cover, writing your life insurance in trust offers a genuine, tried and tested way of:

  1. Getting your life insurance payout to your loved ones quicker
  2. Avoiding inheritance tax

When you ask yourself ‘do I have to pay inheritance tax on life insurance?’, remember that it’s often down to whether the policy has been written in trust. 

Many face the issue of not knowing how to put life insurance in trust, but irrespective of if you want to start a new policy or move your existing cover into trust, here at Unite Life, we can help you with your inheritance tax planning.

If you would like some impartial legal advice about life insurance trusts, or if you simply want to find out more about life cover in general, contact us at Unite Life by completing our short contact form or giving us a call on 08000 106194.

The life insurance inheritance tax rules in the UK change from time to time, so be sure to keep an eye on our blogs and resources for the latest news regarding life cover.


life insurance trust inheritance tax