Life Insurance in Trust: A Complete Guide for UK and Expat Policyholders

A life insurance policy that is not written in trust creates a problem that the policyholder never intended: on death, the proceeds enter the estate, become subject to inheritance tax at 40% on amounts above the nil rate band, and are frozen by the probate process for months — sometimes longer. This delays payment to exactly the people who need it most and potentially reduces the payout significantly.

Writing a life policy in trust addresses all three problems simultaneously. The proceeds pass outside the estate, no inheritance tax applies to them, and payment to the beneficiaries does not require probate. This guide explains how trust structures for life policies work, which type of trust is appropriate in different circumstances, and the practical and regulatory mechanics that every policyholder with a trust-held policy should understand.

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Why the Default — No Trust — Is the Wrong Starting Point

Without a trust, a life insurance policy pays its proceeds to the policyholder's estate on death. This outcome has three significant consequences:

Inheritance tax. The proceeds are added to the total value of the estate. Anything above the nil rate band (£325,000 per individual in 2026, frozen until at least April 2031) is taxed at 40%. On a £1 million policy with a £500,000 estate on top, the total estate of £1.5 million generates a tax bill of approximately £470,000 — paid out of the combined proceeds. If the beneficiaries must use the life insurance payout to fund the IHT bill itself, the net benefit is substantially reduced.

Probate delay. The policy cannot be paid until the grant of probate is obtained. Probate in the UK takes a minimum of several months and frequently longer where the estate is complex or there is a dispute. A surviving spouse with a mortgage and children, who was financially dependent on the deceased, cannot access funds to pay the mortgage while probate proceeds.

No beneficiary certainty. Without a trust, the policy pays into the estate and is distributed according to the will — or the intestacy rules if there is no will. If the policyholder intends the money for a specific person, the policy alone does not guarantee that outcome.

A trust removes all three problems: the proceeds are not part of the estate, no probate is required, and the trust deed specifies (or gives trustees discretion over) who receives what.

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The Two Main Trust Types Used for Life Policies

Bare Trust (Absolute Trust)

A bare trust names fixed beneficiaries at the time the trust is established. The trustees hold the policy, but the beneficial ownership — the right to receive the proceeds — belongs to the named individuals from the outset. This cannot be changed without the beneficiaries' consent once the trust is established.

Advantages of a bare trust:

• Simple to establish; most providers offer a standard bare trust deed
• Proceeds are immediately outside the settlor's estate (provided the settlor is not also a beneficiary)
• No periodic IHT charges apply (the relevant property regime does not apply to bare trusts)
• Administratively straightforward: on death, the trustees pay the proceeds to the named beneficiaries

Limitations of a bare trust:

• Inflexible: if a named beneficiary predeceases the policyholder, or if circumstances change such that a different distribution would be preferable, the trust cannot be amended without the beneficiary's consent
• Unsuitable where potential beneficiaries cannot yet be specified (such as future children or unborn grandchildren)
• Where the policyholder's family situation is likely to change — divorce, new relationship, children not yet born — a discretionary trust may be more appropriate

A bare trust is most suitable for straightforward situations: a married couple with known beneficiaries, a single individual naming adult children, or an expat naming a specific partner in a jurisdiction where the law does not automatically protect cohabiting partners.

Discretionary Trust

A discretionary trust names a class of potential beneficiaries (typically family members or a wider class) and gives trustees the power to decide how to distribute the proceeds. No individual beneficiary has a fixed entitlement — the trustees exercise their discretion in the light of the circumstances at the time of distribution.

Advantages of a discretionary trust:

• Flexible: trustees can respond to family circumstances as they exist on death, including beneficiaries whose identities were not fixed at trust inception (such as future children)
• Can be updated to add beneficiaries during the settlor's lifetime by letter of wishes
• Can be structured to accommodate beneficiaries in different jurisdictions
• Allows trustees to consider tax efficiency at the point of distribution (for example, distributing to a lower-rate taxpayer rather than a higher-rate one)

Limitations of a discretionary trust:

• Subject to the relevant property regime under UK IHT law: periodic charges every 10 years and exit charges on distributions. In practice, these are often nil or very small for pure protection policies, as the trust holds no chargeable assets during the policyholder's lifetime (the policy's cashable value is the relevant value, not the potential death benefit)
• Trustees have genuine discretion and legal duties; appointing trustees who understand those duties is important
• May require more active administration — trustees should keep records, hold meetings, and document decisions

A discretionary trust is most suitable for clients with complex family structures, uncertain future family composition, cross-border beneficiaries, or large estates where trustee flexibility has meaningful planning value.

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Changing Trustees

Trustees can be changed during the settlor's lifetime, provided the mechanism is available under the trust deed. Most provider-issued trust deeds include a deed of appointment by which the settlor (or an appointing trustee) can appoint new trustees or remove existing ones. Common reasons to change trustees include:

• A trustee's death or incapacity
• A trustee emigrating to a jurisdiction where their ability to act is legally complicated
• A change in family circumstances that makes a previous trustee (such as an ex-spouse) inappropriate
• A professional trustee being engaged to manage a complex trust

Appointing a professional trustee — such as a trust company or a solicitor — is worth considering for large policies or complex international situations. The cost is typically an annual fee, but the expertise and continuity may be valuable.

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HMRC Trust Registration (TRS)

Since amendments to UK anti-money laundering regulations in 2020 and 2021, most UK express trusts — including life assurance trusts — must be registered with HMRC's Trust Registration Service, even where the trust has no ongoing tax liability.

Key points:

• Registration must be completed within 90 days of the trust being established for non-taxable trusts created after September 2022
• The registration captures details of the trust, the trustees, the settlor, and the beneficial class
• Trustees are responsible for maintaining and updating the registration if circumstances change
• Failure to register can result in financial penalties

Some trusts are exempt from TRS registration — notably certain insurance trusts that meet the definition of a "pilot trust" or that are within specific statutory exclusions. However, the safest approach is to register unless an adviser has confirmed that an exemption applies.

For offshore policies held in an Isle of Man or Guernsey trust structure, TRS registration requirements depend on whether the trust has UK connections (UK-resident trustees, UK-sited assets, or UK-resident beneficiaries). Professional advice is important to establish the correct position for cross-border trusts.

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The Settlor-Interested Trust Problem

A fundamental rule of UK trust law must be observed when establishing a life assurance trust: the settlor (the person who creates the trust and whose life is insured) must not be a beneficiary of the trust.

If the settlor retains a benefit — for example, if they are included among the class of beneficiaries under a discretionary trust — the trust is "settlor-interested." Under UK tax law, income and gains of a settlor-interested trust are treated as the settlor's income and gains for tax purposes. More critically for IHT planning, if the settlor can benefit from the trust, the transfer into trust may not be treated as an outright gift and the policy may remain within the settlor's estate.

The solution is straightforward: ensure that the trust deed excludes the settlor as a potential beneficiary. Most provider-issued trust deeds do this automatically, but it is worth confirming — particularly with bespoke or international trusts where the drafting may vary.

A joint life policy presents a specific variant of this issue: if both lives are insured and both are also beneficiaries, the trust may be settlor-interested in respect of both. The solution is typically a separate bare trust for each life, or a carefully drafted discretionary trust that excludes the second life assured from benefit until after the death of the first.

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International Trusts for Cross-Border Policies

For expats with Isle of Man, Guernsey, or other offshore policies, the trust structure can be established under the law of the policy jurisdiction rather than UK law. Isle of Man trusts are governed by the Isle of Man Trustee Act and offer robust policyholder protections under IoM law. Guernsey trusts operate under Guernsey's trust legislation, which is widely regarded as one of the most well-developed trust law frameworks in the world.

Key advantages of an offshore trust for an international policy:

• The trust is not automatically subject to UK IHT's relevant property regime, depending on the residence and domicile of the settlor and trustees
• Distribution can be made to beneficiaries in multiple jurisdictions without requiring probate in any single country
• Trustee decisions are governed by the trust deed and the law of the issuing jurisdiction, which may be more flexible than UK law in accommodating multinational families

The interaction between a UK-domiciled settlor's worldwide estate and an offshore trust is complex — particularly following the April 2025 changes to the UK IHT long-term residence rules. Professional advice from a specialist in cross-border estate planning is essential to ensure the trust structure achieves its intended purpose.

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Absolute vs Discretionary Nomination: Not the Same as a Trust

Many life insurance policies offer a nomination mechanism — the policyholder nominates a beneficiary to receive the proceeds. This is not the same as writing the policy in trust, and the distinction is important.

An absolute (irrevocable) nomination designates a specific individual and cannot be changed without the nominee's consent. The nominated person has a contractual right to the proceeds. This keeps the payment out of probate — the insurer pays directly to the nominee — but does not necessarily remove the proceeds from the estate for IHT purposes.

A discretionary nomination (also called a revocable nomination in some markets) allows the policyholder to indicate preferred beneficiaries, but the insurer pays at its discretion and the proceeds remain within the estate. This provides little effective protection.

Neither nomination mechanism provides the same legal protection as a properly constituted trust. For IHT planning purposes, a trust is the appropriate structure. Nominations may be appropriate for straightforward policies under a certain threshold, or in jurisdictions where trust structures are not available, but they are not a substitute where estate planning is the objective.

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Practical Steps for Writing a Policy in Trust

1. At inception: establish the trust at the same time as the policy is issued. This is administratively simpler than transferring an existing policy into trust and avoids the IHT complications of a retrospective gift.
2. Choose the right trust type: bare trust for certainty with fixed beneficiaries; discretionary trust for flexibility with complex or uncertain family structures.
3. Appoint appropriate trustees: minimum two trustees is good practice; consider a professional trustee for large or complex trusts.
4. Register with TRS: register the trust within the required timeframe and keep the registration updated.
5. Exclude the settlor as beneficiary: confirm that the trust deed correctly excludes the settlor-interested trust scenario.
6. Keep a letter of wishes: for discretionary trusts, a letter of wishes is not legally binding but guides trustees on the settlor's intentions. Update it when circumstances change.
7. Review after major life events: marriage, divorce, birth of children, or death of a trustee or beneficiary should all prompt a review of the trust structure.

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How Global Investments Can Help

Global Investments advises internationally mobile clients on protection planning integrated with estate planning and tax strategy. Our advisers are experienced in the full range of trust structures available for life insurance policies — from provider-issued bare trusts for straightforward situations to professionally administered discretionary trusts for complex international families.

We work with specialist trust companies and solicitors in the Isle of Man, Guernsey, and other relevant jurisdictions, and ensure that our clients' trust structures are correctly established, registered, and maintained. If you have an existing policy that is not in trust, we can advise on the options and costs of establishing trust protection now.

Contact Global Investments to discuss your protection and estate planning requirements.

Trust law, inheritance tax, and the rules governing HMRC Trust Registration are subject to change. This guide reflects the position as understood in 2026 and is for information purposes only. It does not constitute legal or tax advice. You should obtain professional advice specific to your circumstances before making any decisions regarding trust structures or insurance.