Inheritance tax can be an unwelcome shock for families of even moderately wealthy individuals. An estate worth £2 million with no planning may face a tax bill of £550,000. The challenge is not just the size of the bill — it is the timing. HMRC requires payment within six months of death, and in practice the tax must often be paid before probate is granted. Without the Grant of Probate, the estate's assets cannot be accessed. Without accessing the assets, the tax cannot be paid. The result is a liquidity trap that catches many families off guard.
Life insurance written in trust is the most straightforward and certain solution to this problem. It does not reduce the IHT liability itself — that requires other strategies — but it provides the liquidity to pay the bill promptly, prevents forced asset sales, and gives the family time to administer the estate properly.
The IHT Liquidity Problem in Detail
HMRC's six-month payment deadline for IHT runs from the end of the month of death. Interest accrues on unpaid IHT at the current HMRC rate (which can be significant — 7.75% as at January 2026, though this changes in line with HMRC's interest rate policy) after the deadline.
For most estates, the assets are illiquid. Property cannot be sold quickly without accepting a discount; investment portfolios should not necessarily be sold at market prevailing at the time of death. In practice, HMRC's requirement for payment before Probate means that families often have to borrow — typically through a bridging loan or bank facility — to fund the IHT liability while waiting for the estate to be realised. The bank loan costs interest; the borrowing takes time and adds stress to an already difficult period.
Some financial institutions offer "IHT direct payment" arrangements where they pay HMRC directly from the estate's bank accounts — but this applies only to cash and some National Savings instruments, not to the bulk of a high-net-worth estate.
Life insurance resolves this cleanly. The policy pays out on death (or on second death for a joint policy) to the trustees of a discretionary trust. Those trustees — typically the same people as the executors, or family members coordinated with the executors — receive the cash, and use it to pay the IHT bill. The estate then proceeds through probate in an orderly fashion.
The Policy Structure
The right structure for IHT-focused life insurance is:
Whole-of-life insurance. The policy must have no expiry date, because IHT does not have a deadline. A 20-year term policy expires before you die if you live past the term — leaving the estate with the original problem. Whole-of-life insurance pays whenever death occurs, provided premiums continue to be paid.
Guaranteed premium. Most whole-of-life policies are either guaranteed premium (the premium is fixed for life at outset and will never increase) or reviewable premium (the premium is reviewed periodically, typically every 10 years, and may increase significantly as you age). For IHT planning, guaranteed premium products are strongly preferred — they provide certainty. The insurer accepts the mortality risk in exchange for the fixed premium.
Written in a discretionary trust. This is the essential step that most people miss. If the policy is not in trust, the sum assured forms part of the estate — adding to the IHT liability rather than solving it. The policy must be assigned to a discretionary trust before or at the time of inception. Once in trust, the proceeds pass directly to the trustees outside the estate, immediately available and not subject to IHT.
Sum assured calibrated to the expected IHT liability. The sum assured should reflect your best estimate of the IHT liability at the time the policy is taken out, with consideration for future estate growth. Many clients review and increase their cover as the estate grows.
Joint Life Second Death Policies
For married couples or civil partners, IHT between spouses is fully exempt — assets can pass to the surviving spouse free of tax using the spousal exemption. The IHT liability typically crystallises only on the second death, when the estate passes outside the exempt spousal relationship.
A joint life second death (JLSD) policy is written on two lives and pays out only when the survivor dies. Because it does not pay on the first death (when no IHT is typically due), it is significantly cheaper than two separate single-life whole-of-life policies. It precisely matches the timing of the IHT liability — making it highly efficient.
The JLSD policy should also be written in a discretionary trust, so the proceeds pass outside the second estate and are not themselves subject to IHT.
The Cost of IHT Insurance
The cost of whole-of-life insurance depends on age, health, gender, and the sum assured. Premiums are typically higher for older policyholders, those with health issues, and smokers. Illustrative ranges (which vary significantly by insurer, individual health status, and market conditions):
- A healthy non-smoker aged 50 might pay approximately £1,000–£2,500 per year for £500,000 whole-of-life cover
- The same person at age 60 might pay £2,000–£5,000 per year
- At age 70, costs increase substantially and underwriting may be more challenging
These are illustrative ranges only — actual premiums require a full medical underwriting assessment, and significant variation exists between insurers. The key principle is that age matters greatly: establishing the policy earlier locks in a lower guaranteed premium for life.
For some clients with health issues, obtaining standard terms may not be possible. Specialist impaired-life insurers can sometimes provide cover where standard insurers decline, though at higher premiums. For very large sums, policies can be underwritten by a panel of insurers sharing the risk.
Life Insurance as Part of a Broader IHT Strategy
Life insurance solves the liquidity problem — it does not reduce the underlying IHT liability. For a comprehensive IHT plan, life insurance should work alongside other strategies.
Gifting. Making Potentially Exempt Transfers (PETs) — cash or asset gifts to individuals — removes the value from the estate after seven years. Regular gifts from income are immediately exempt. Annual exemptions (£3,000 per year per donor) are immediately exempt. A coordinated gifting programme, started early, can significantly reduce the estate over time.
Trusts. Discretionary trusts, property protection trusts, or loan trusts can hold assets in a way that reduces the taxable estate, depending on how they are structured.
Business Property Relief and Agricultural Property Relief. These reliefs can eliminate IHT entirely on qualifying business and agricultural assets — potentially removing significant value from the IHT calculation.
RNRB (Residence Nil Rate Band). Using the RNRB correctly — including the transferable RNRB from a deceased spouse — can add up to £350,000 of additional nil-rate band for a couple, reducing the taxable estate accordingly.
Life insurance provides the floor: a guaranteed, certain source of liquidity to pay whatever IHT remains after other planning has done its work. The premium is the known, manageable cost of certainty. Combining it with gifting, trust planning, and efficient use of reliefs creates a layered, robust IHT strategy.
Practical Considerations
Assignment into trust promptly. If you have an existing whole-of-life policy that is not in trust, you can assign it into a discretionary trust at any point — this is not itself a gift of value for IHT purposes (the policy in trust is a gift with reservation considerations, but most advisers structure this correctly). The sooner this is done, the sooner the protection is in place.
Trustee quality. The discretionary trust needs capable trustees — typically family members or close friends, sometimes a professional trustee for larger policies. Trustees should be briefed on their role and understand they will receive the policy proceeds and be responsible for paying the IHT bill.
Coordination with executors. The trustees of the life insurance trust and the executors of the will are distinct roles (though often the same people). Coordination between them in the weeks after death — with the insurer, HMRC, and the estate's lawyers — is essential to ensure the process runs smoothly.
As with all financial planning decisions, tax rules governing IHT, life insurance, and trusts can change. The guidance in this article reflects the position as at 2026, and professional advice should always be sought in the context of current legislation.
How Global Investments Can Help
Global Investments works with high-net-worth individuals and families to build comprehensive IHT plans that include life insurance as a key component. We can introduce you to specialist protection advisers who can obtain whole-of-life quotes, assist with trust drafting, and coordinate the insurance element with your broader estate plan. If you have an existing estate planning review or would like to start one, contact us to discuss your situation.
Frequently Asked Questions
Does life insurance sum assured count as part of my estate for IHT?
Not if the policy is correctly written in trust. A life insurance policy written in a discretionary trust pays out to the trustees, not to the estate — so the proceeds do not form part of the estate for IHT purposes and are available immediately to pay the tax bill, without waiting for probate.
What is a whole-of-life policy and how does it differ from term insurance?
Term insurance covers a fixed period and pays out only if you die within that term. Whole-of-life insurance has no fixed term — it pays out whenever you die, as long as premiums continue to be paid. For IHT planning, whole-of-life is the appropriate product because IHT does not have a deadline.
What is a joint life second death policy?
This is a policy on two lives (typically a married couple) that pays out only when the second of them dies. Because IHT between spouses is exempt — the estate passes to the survivor free of tax — the IHT liability typically crystallises on the second death. A joint life second death policy therefore directly matches the timing of the liability.
Are guaranteed premium whole-of-life policies expensive?
Cost depends heavily on age, health, and the sum assured. A healthy non-smoker aged 60 might pay £2,000–£5,000 per year for £500,000 of whole-of-life cover, though this varies considerably between insurers and individuals. At age 70 or older, or for someone in poor health, premiums increase substantially. The earlier the policy is established, the lower the guaranteed premium.
This guide is for general information only and does not constitute financial advice or a personal recommendation. The value of investments can fall as well as rise and you may get back less than you invest. Tax rules, pension legislation, and investment regulations change — always verify current rules and seek advice from a qualified independent financial adviser before making any financial decisions.