Introduction
Inheritance tax (IHT) is a material concern for UK expats, and the April 2025 reforms have made it a more pressing issue than at any point in recent decades. Many expats who left the UK believing they had severed their IHT exposure now find that the new long-term residence test brings their worldwide assets — including offshore savings, property, and business interests — back within the UK IHT net for several years after departure.
Life assurance written in trust is one of the most direct and cost-effective responses to this problem. When structured correctly, the death benefit passes outside the estate, free of IHT and free of the probate process. This guide explains how the trust structures work, which type is appropriate in different circumstances, and the practical mechanics a UK expat needs to understand.
The IHT Problem for UK Expats
UK inheritance tax applies at 40% on the value of an estate above the nil rate band. In 2026, the nil rate band is £325,000 per person, frozen until at least April 2031. The residence nil rate band (RNRB) provides an additional £175,000 where a main residential property is left to direct descendants (children or grandchildren), but this allowance tapers away for estates above £2 million and may be unavailable to expats who no longer hold a UK main residence.
For a married couple making full use of both sets of allowances, the combined IHT-free threshold can reach £1 million. Everything above that is taxed at 40%.
The critical change from April 2025 is the replacement of the domicile-based test with a long-term residence test. Under the new rules:
- An individual who has been UK-resident for 10 or more of the previous 20 tax years is a long-term UK resident for IHT purposes.
- Their worldwide assets — not just UK-sited assets — are within the IHT estate on death.
- The status persists for some years after leaving the UK, depending on the number of UK-resident years.
For someone who lived in the UK for 20 years and has recently moved to Cyprus, UAE, or Thailand, the worldwide estate may remain within the UK IHT net for between 3 and 10 years depending on residency history. Specialist advice is required to determine the precise position.
How a Life Assurance Policy Written in Trust Solves the Problem
A life assurance policy held personally is an asset of the estate. On death, the insurer pays the claim to the estate, which goes through probate and is subject to IHT alongside all other assets.
A life assurance policy held in trust is legally owned by the trustees, not the deceased. On death:
- The insurer pays the claim directly to the trustees.
- The trustees distribute the proceeds to the beneficiaries according to the trust deed.
- The proceeds never form part of the deceased's estate — there is no IHT liability and no probate delay.
This is not a complex or aggressive tax structure. It is standard practice recommended by HMRC itself as an entirely legitimate way to use life assurance for estate planning.
The Main Trust Types
Discretionary Trust
A discretionary trust gives the trustees full discretion over how to distribute the proceeds among a defined class of beneficiaries. The settlor (the person taking out the policy) specifies a class — for example, "children and grandchildren" or "spouse and issue" — and the trustees decide the appropriate distribution at the time of a claim.
Advantages: Highly flexible; the settlor can provide a letter of wishes to guide trustees without legally binding them; allows for changing family circumstances without needing to alter the trust deed; suitable for complex family structures including blended families.
Disadvantages: Subject to the relevant property regime — periodic charges every 10 years of up to 6% on trust assets above the nil rate band, and exit charges when assets leave the trust. For pure protection policies, the periodic charge is typically nil or very small during the policy term because a term life policy in the absence of a claim has no surrender value.
The discretionary trust is the most widely used structure for offshore life assurance in international estate planning.
Absolute (Bare) Trust
An absolute trust names specific beneficiaries whose entitlement is fixed and cannot be changed. The beneficiaries have an immediate, indefeasible right to the trust assets.
Advantages: Simple to establish; not subject to the relevant property regime (no 10-year charges); the beneficiary's entitlement is clear and unambiguous; lower administrative burden.
Disadvantages: Inflexible — if a named beneficiary dies, divorces, or circumstances change, the trust cannot easily be altered; not suitable for couples with children from multiple relationships or where family arrangements may evolve.
An absolute trust works well where the settlor has a clear and settled view of who should benefit — for example, an expat with a spouse and adult children who are unlikely to predecease.
Split Trust
A split trust divides the policy so that the pure life cover element sits in trust (and is therefore outside the estate) while any critical illness or investment element remains with the policyholder personally.
When it is used: Where a combined life and critical illness policy is being arranged and the policyholder wants the critical illness payout available to themselves during their lifetime, but wants the life cover to pass free of IHT on death.
Advantage: The policyholder retains access to the living benefit without triggering a gift-with-reservation issue on the trust element.
The Mechanics of a Trust
The key parties to a life assurance trust are:
- Settlor: The person who takes out the policy and places it in trust. Typically the life assured.
- Trustees: The legal owners of the policy during the trust term. Usually includes the settlor's spouse or partner and one or more additional trustees (a trusted friend, adult child, or professional trustee). The settlor is often also a trustee but cannot be the sole trustee.
- Beneficiaries: Those who will receive the proceeds on a claim — specified in the trust deed (absolute trust) or as a class with trustee discretion (discretionary trust).
The trust deed is usually provided by the insurer at no additional cost. The settlor signs the deed at the same time as completing the policy application. The policy is then legally owned by the trustees from inception — there is no prior period of personal ownership that could trigger a gift-with-reservation argument.
The Surviving Spouse Exemption
Assets passing to a spouse or civil partner on death are exempt from UK IHT regardless of value, under the spouse exemption. This might lead some to ask whether a trust is necessary if the estate passes to a spouse first.
The trust still matters for several reasons:
- Second death: The spouse exemption only defers IHT. On the second death, the combined estate (including the survivor's own assets plus those inherited from the first spouse) will be subject to IHT. The nil rate band is available, but significant estates will still face a 40% charge.
- Probate delay: Even if no IHT is payable, a policy not in trust must go through probate before the payout is released — a process that frequently takes 6 to 12 months and can leave a surviving spouse without access to the funds during that period.
- Long-term residence exposure: The surviving spouse who inherits a large estate may themselves face an IHT charge on assets above the combined threshold, particularly if they have a long UK residence history.
A trust with the spouse as a named beneficiary alongside children achieves the best of both worlds: immediate access without probate, and flexibility for the trustees to consider the spouse's own IHT position in distributing the proceeds.
Using Offshore Policies in Trust for Legacy Planning
Offshore life assurance policies — particularly whole-of-life policies issued by Isle of Man or Guernsey providers — can carry very large sums assured and are well-suited for legacy planning when placed in trust. A common arrangement for an expat with a high-value estate is a whole-of-life policy in a discretionary trust specifically designed to fund the anticipated IHT bill on the second death of a married couple, without requiring the beneficiaries to sell illiquid assets (property, business interests) to meet the tax charge.
The premium for such a policy is calculated actuarially and, for healthy applicants, is substantially less than the eventual IHT saving.
How Global Investments Can Help
Global Investments has over 32 years of experience advising UK expats and internationally mobile professionals on inheritance tax planning and the use of life assurance in trust structures. Our advisers can assess your current IHT exposure under the post-April 2025 long-term residence rules, recommend the most appropriate trust type for your family circumstances, and introduce you to providers offering well-structured offshore whole-of-life and term policies in established jurisdictions.
We work with trustees, legal advisers, and tax specialists where the complexity of your estate requires it, and we review trust structures at regular intervals to ensure they remain fit for purpose as circumstances change.
This guide is for information only and does not constitute legal or tax advice. Inheritance tax law is subject to change. Seek qualified professional advice before establishing a trust or placing a life assurance policy in trust.
Frequently Asked Questions
What is the UK inheritance tax nil rate band in 2026?
The nil rate band remains £325,000 per individual in 2026, frozen until at least April 2031 under current government plans. The residence nil rate band adds up to £175,000 where a main residence passes to direct descendants, giving a combined threshold of £500,000 per person or £1 million for a married couple using both sets of allowances.
Does the April 2025 long-term residence rule affect expats?
Yes. From April 2025, individuals who have been UK-resident for 10 or more of the previous 20 tax years are treated as long-term UK residents for IHT purposes, meaning their worldwide assets — not just UK-sited assets — are subject to UK inheritance tax on death. This change replaces the previous domicile-based test and catches many long-term expats who believed they had left the UK IHT net.
What is the 10-year anniversary charge on a discretionary trust?
Discretionary trusts are subject to the relevant property regime under UK inheritance tax law. Every 10 years, the trust assets are valued and a periodic charge of up to 6% is applied to the value above the nil rate band. In practice, for many life assurance policies in trust — particularly pure protection policies where the fund value is modest relative to the sum assured — this charge is negligible or nil.
Can I put an existing policy into trust retrospectively?
An existing policy can be assigned to a trust, but doing so may constitute a gift for IHT purposes. If the policy has a surrender value at the point of transfer, that value may be treated as a potentially exempt transfer (PET) or chargeable lifetime transfer, with IHT implications if you die within 7 years. Inception is the correct time to establish the trust structure.
What happens to a life assurance policy not written in trust?
A policy not written in trust pays its proceeds to the deceased's estate. The proceeds must pass through probate, which delays payment — often by 6 to 12 months — and the full amount is added to the estate for IHT calculation. On a £1 million policy above the nil rate band, this could produce a tax bill of up to £270,000 that the beneficiaries must fund before receiving anything.
This guide is for general information only and does not constitute financial or insurance advice. Policy terms, premium rates, and insurer eligibility criteria change — always verify current terms with a qualified independent adviser before taking out any policy.