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If you have a life insurance policy, you can make sure it’s outside your estate by writing your policy in trust. This means it won’t count towards the money you leave when working out how much inheritance tax (IHT) you may owe.
Growing numbers of estates fall into the inheritance tax net every year thanks to rising property prices and frozen tax thresholds. Latest data from HMRC shows that the taxman raked in a massive £5.8 billion in inheritance tax between April and November last year alone – £84m more than the same period a year ago.
Helen Morrissey, head of retirement analysis, Hargreaves Lansdown, said: “It looks like we are on track for another record year. It’s a tax that is increasingly on people’s radar after the announcement that pensions would be included in estates for inheritance tax purposes from 2027. It will drag a lot more families into paying this tax and we can expect people to spend time in 2026 thinking about what they can do to manage their tax bill.”
Here, we look at how life insurance is often used to cover potential IHT bills, and how to protect any payout from falling into your estate for inheritance tax purposes.
Why take out life insurance?
Most people take out life insurance so that their loved ones will be financially protected in the event that they die. It can provide valuable peace of mind that any financial commitments such as a mortgage will be covered, along with any other expenses that couldn’t otherwise be paid if you’re no longer around.
Increasingly, people are also using life insurance to provide their loved ones with a lump sum to pay any inheritance tax bill when they die. Although this won’t reduce the amount you have to pay, it can mean that they don’t end up with a potentially large bill to pay from your estate.
Duncan Mitchell-Innes, partner and deputy head of private clients at TWM Solicitors, said: “Other than gifting assets, there are fewer and fewer ways to reduce your family’s IHT bill. Life insurance is one of the few routes left and we have seen an increased number of enquiries for advice in this area.”
Why hold your policy in trust?
You should write a life insurance policy designed to cover an inheritance tax bill in trust, otherwise the proceeds will just increase the value of the money and property you leave behind. As well as saving inheritance tax, it also means you don’t have to wait for probate (which can take many months) for the policy to pay out.
Nearly 7,500 families paid inheritance tax on life insurance policies according to HMRC figures released in August 2025, but many would have escaped a bill if their policy was written into trust.
Of the 31,500 estates that paid inheritance tax in 2022/23, HMRC said that nearly a quarter of them (7,458) included life insurance policies. These life insurance policies were worth a total of £865m, meaning up to £346m of inheritance tax may have been unnecessarily paid on them.
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.”
Find out more about how Inheritance Tax works in our guide Understanding Inheritance Tax and about other steps you need to take when a loved one passes away in our article What to do when someone dies.
How do I write a life insurance policy in trust?
This is normally free to do and typically involves filling in a form. You can either do it when you take out the cover, or later on, and your life insurance provider should provide you with the form.
Sean McCann, Chartered Financial Planner at NFU Mutual, the financial advisory firm, explained: “Putting life insurance policies into trust is relatively straightforward. If you have life insurance and it isn’t in trust, phone your provider and ask for a trust form.
“Provided you’re in good health when you put it into trust, there are normally no inheritance tax implications, as in most cases the policy has no value.
“However, if you are seriously ill when you put the policy in trust and die within seven years, HMRC could argue that the policy had a value when you put it into trust and seek to include that value in your estate and charge inheritance tax.
“Using a trust can also mean a speedier payout in the event of a claim, as the family won’t need to wait for probate, which can make a huge difference to dependants relying on the money to cover day-to-day bills.”
A final thought
Having said that, writing policies in trust can be very simple and needn’t cost you anything; it is worth checking with your solicitor whether you should do more. If you’re a couple, it may make sense to spend some money on a trust to make sure you minimise the inheritance tax bill when the second person dies.
A life insurance policy that pays out enough to cover your inheritance tax bill when you die may make sense, but the premiums could be expensive if you’re older and/or have had health problems, so seek advice if you’re not sure whether this is the right option for you.
If you’re looking for a solicitor, you can find one through the Law Society’s free Find a solicitor service. Make sure you check reviews for the solicitor you’re planning to use, so you can see how other people have rated their service.
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