Life Assurance in Trust to Pay IHT Liabilities

Why Write a Life Policy in Trust?

Life assurance is one of the oldest and most straightforward tools in the estate planner's kit. A whole-of-life insurance policy provides a guaranteed tax-free payout on death. When that payout is used to meet an IHT liability, the family avoids being forced to sell assets — perhaps a business, agricultural land, or a family home — to pay the tax bill.

But there is a crucial structuring point: if a life policy is not written in trust, the proceeds form part of the deceased's estate and are themselves subject to IHT. A £1 million policy designed to pay a £1 million IHT bill would, in the worst case, increase the estate's value by £1 million — creating a further £400,000 IHT liability. The policy must be written in trust to avoid this problem.

When correctly structured, a life policy in trust:

• Pays out to the trustees on death
• Pays out outside the estate — so the proceeds are not themselves subject to IHT
• Is available to the trustees to pass to the family, pay the IHT directly, or make a loan to the estate to fund the tax payment

This guide explains how life assurance in trust works for IHT planning, the types of policy used, trust structures, the important question of who pays the premiums, and the practical considerations for internationally mobile individuals. All figures are as of 2026.

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Who Needs a Life Policy in Trust for IHT?

Not every estate benefits from this strategy. A life policy in trust is most valuable where:

• There is a confirmed IHT liability — the estate is above the available nil-rate bands (£325,000 individual NRB + up to £175,000 RNRB = up to £500,000 per person, or up to £1 million for a married couple using both NRBs)
• The estate includes illiquid assets — a business, agricultural land, property, a large pension (post-2027), or concentrated shareholdings
• The family cannot easily fund the IHT from other liquid assets — and a forced sale would cause significant loss of value or business disruption
• The insured is in reasonably good health — life insurance becomes expensive and sometimes unavailable for older or less healthy individuals; early planning is important

For many business owners, farmers, and families who own significant property, the combination of a confirmed IHT liability and limited liquidity makes life assurance in trust the most practical solution.

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Types of Life Policy Used

Whole-of-Life Assurance

The most common policy type used for IHT planning. Provides a guaranteed sum assured payable on death, whenever that occurs — no expiry date. The insured pays premiums throughout their lifetime (or for a defined period).

Reviewable versus guaranteed premiums: Most whole-of-life policies involve reviewable premiums — the insurer reviews the premium periodically (typically every five or ten years) and may increase it based on the fund performance or changed mortality assumptions. Guaranteed premium policies are more expensive at outset but provide certainty. For long-term IHT planning, guaranteed whole-of-life policies are generally preferable.

Key consideration: Whole-of-life premiums are relatively expensive, particularly for older insured persons. For a 70-year-old, the premium for £1 million of whole-of-life cover can easily exceed £40,000 per year. This must be weighed against the IHT liability it is intended to fund.

Term Assurance

Pays out only if death occurs within the policy term (for example, 20 years). Less expensive than whole-of-life but provides no benefit if death occurs after the term expires. Suitable for a specific planning period — for instance, during the seven-year potentially exempt transfer window when the insured is making significant lifetime gifts.

Reducing term assurance is sometimes used to match reducing IHT exposure during a PET's seven-year period (the value of the PET that falls back into the estate reduces as the seven years progress under taper relief).

Second-to-Die (Survivorship) Policy

Pays out on the death of the second of two insured lives (typically a married couple). The IHT liability on the first death is typically mitigated by the spousal exemption; the second death triggers the full liability. A second-to-die policy is therefore often more cost-effective than two separate whole-of-life policies for a married couple.

Gift and Loan Plan (Back-to-Back)

A more sophisticated structure sometimes used for older or less healthy individuals where traditional whole-of-life cover is unaffordable. The individual makes a gift to a trust and takes out an investment bond within the trust, alongside a whole-of-life plan. The gift reduces over time as it is used to fund the premiums; the bond and policy provide the IHT funding. This is a complex structure requiring specialist advice.

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The Trust Structure

The policy must be placed in a trust that is separate from the insured's estate. Common trust structures used:

Discretionary Trust

The most flexible option. The trustees have discretion over the ultimate distribution of the policy proceeds among a class of beneficiaries (typically the family). A discretionary trust:

• Falls outside the estate on the insured's death (the trust owns the policy, not the insured)
• Allows the trustees to decide how to use the proceeds — paying IHT on behalf of the estate (via a loan or gift), distributing to family members, or holding for future use
• Is subject to the relevant property regime for IHT purposes — but a whole-of-life policy held in trust has a relatively low value for ten-year anniversary charge purposes (the chargeable value is typically only the surrender value, which for a whole-of-life policy written in trust may be nil or very low)

Life Interest Trust

Less flexible — the income beneficiary is specified. Used in specific circumstances, for example, where the policy is intended to provide income for a surviving spouse rather than a capital sum.

Absolute (Bare) Trust

The simplest structure — the beneficiaries are fixed and cannot be changed. Useful where the identities of the intended beneficiaries are known and will not change, and the settlor is confident in that position. Unlike a discretionary trust, a bare trust does not fall within the relevant property regime — the proceeds are attributable to the beneficiaries directly.

Split Trust

Some policies (including critical illness cover combined with life cover) use a split trust, where the critical illness proceeds are paid to the individual (who will need them for medical care) while the life assurance element is held in trust for IHT planning purposes.

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Who Pays the Premiums?

The question of how premiums are paid affects both the IHT treatment of the premium payments and the practical sustainability of the arrangement.

Gifts from Normal Expenditure Out of Income

This is the most tax-efficient approach where available. Under s.21 IHTA 1984, a gift is exempt from IHT if:

• It is made as part of the normal expenditure of the donor
• It is made out of income (not capital)
• It leaves the donor with sufficient income to maintain their usual standard of living

Premium payments for a life policy in trust can qualify for this exemption, provided the premiums are paid regularly and from the settlor's income (employment income, dividend income, pension income, rental income). The exemption is unlimited in amount if all three conditions are met.

This is a particularly powerful and underused relief. A donor with surplus income of £50,000 per year can pay £50,000 in annual premiums — year after year — with no IHT consequence, provided the expenditure is truly normal and from income.

Key documentation: HMRC requires evidence that the "gifts from income" exemption applies. Keep a record of income (by source, year by year), annual expenditure, and premium payments. An accountant can assist with the documentation.

Annual Exemption

The annual exemption of £3,000 per year can be used to fund the first £3,000 of premiums where the "gifts from income" exemption is not available.

Potentially Exempt Transfers (PETs)

Premium payments not covered by exemptions may be PETs if paid to individuals, or chargeable lifetime transfers (CLTs) if paid into the discretionary trust. PETs become fully exempt after seven years. CLTs use the settlor's nil-rate band.

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The Policy in Practice: How the Proceeds Are Used

When the insured dies, the policy trustees (not the deceased's personal representatives) receive the payout. The trustees can then:

1. Make a loan to the deceased's estate: The trustees lend the proceeds to the personal representatives, who use the money to pay the IHT due. The loan is repayable by the estate — but by this point, the estate has sufficient liquidity (the frozen assets can be sold over time) and the IHT has been paid without forced sale. This is the most common approach.

2. Make gifts to the beneficiaries: The trustees distribute the proceeds to the beneficiaries, who may choose to use their inheritance to pay the IHT on the estate.

3. Pay IHT directly: In some cases the trustees can arrange to pay IHT directly to HMRC.

The crucial advantage of the trust is that the proceeds do not form part of the estate — they pass directly from the insurer to the trustees, bypassing the estate and avoiding a further IHT charge on the policy proceeds themselves.

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International Considerations

For internationally mobile individuals, writing a life policy in trust raises additional questions:

Policy jurisdiction: UK whole-of-life policies are subject to UK insurance regulation (FCA). Offshore policies (written by Isle of Man, Irish, or Luxembourg insurers) may offer additional flexibility in investment choice and currency denomination. For non-UK residents, offshore policies may be more appropriate.

Trust jurisdiction: The trust can be established in any appropriate jurisdiction — UK or offshore. For those who are not long-term UK residents (the residence-based test that replaced domicile from 6 April 2025), an offshore trust (Jersey, Guernsey) holding non-UK assets may be more tax-efficient, particularly where excluded property treatment is sought — though excluded property status now turns on the settlor's long-term-resident status rather than domicile.

IHT applicability: The IHT analysis assumes the policy proceeds fall within the scope of UK IHT. Since 6 April 2025 the domicile-based system has been replaced by a residence-based regime: an individual is within the scope of UK IHT on their worldwide estate once they are a "long-term UK resident" (broadly, UK-resident for at least 10 of the previous 20 tax years). For those who are not long-term UK residents, only UK-situs assets are generally in scope — and UK-situs policy proceeds (a policy issued by a UK insurer) may still be caught. Offshore policy proceeds may not be UK-situs and may not be subject to UK IHT — in which case the "written in trust" requirement is less critical from a UK IHT perspective, though still relevant for succession planning generally.

Health and underwriting: Older or less healthy individuals may face significant loadings or even be declined for standard whole-of-life cover. Specialist high-net-worth underwriters (Lloyd's of London market participants, specialist HNW insurers) often provide broader underwriting capacity for large sums assured.

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Key Practical Steps

1. Quantify the IHT liability — with your adviser, calculate the expected IHT bill based on your current estate, available nil-rate bands, reliefs, and planned lifetime gifts.

2. Obtain premium quotations — whole-of-life and second-to-die quotes from multiple insurers. Consider both reviewable and guaranteed options.

3. Set up the trust first — create the trust deed before the policy is issued. The policy is then "written in trust" from the outset. Assigning an existing policy into trust after the fact is possible but creates a disposal for CGT purposes.

4. Establish the "gifts from income" exemption evidence — document income and expenditure to support the exemption.

5. Notify beneficiaries and trustees — ensure the trustees know the trust exists, understand their responsibilities, and have access to the policy documentation.

6. Review annually — as the estate value grows (or shrinks), as tax law changes (as dramatically demonstrated by the 2026 BPR reforms), and as premiums are reviewed, the adequacy of the life cover must be assessed.

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How Global Investments Can Help

Global Investments can help you quantify your IHT exposure, identify the appropriate policy structure and amount, connect you with specialist life assurance underwriters (including high-net-worth and offshore specialists), and ensure the trust is correctly established in coordination with your legal advisers.

We provide a whole-of-picture approach — integrating life assurance with your estate plan, trust structures, and investment strategy to ensure your family is protected.

Contact us to arrange a confidential IHT and life assurance planning review.

This guide is for general information only and does not constitute financial, legal, or tax advice. Insurance and trust arrangements are regulated activities and require qualified professional advice. Rules and tax treatment change over time. As of 2026.