Cheap Whole Life Insurance in Trust to Pay Inheritance Tax Bill
Published / Last Updated on 09/05/2025
Our wealth is under ever increasing attack by successive governments from inheritance taxes on death:
- Nil rate band allowance of £325,000 has not been increased since 2009.
- Residence nil rate band of £175,000 has not been increased since 2020.
- Both these nil rate bands are currently frozen and expected to be frozen until at least 2028.
- Agricultural and Business Property Relief has been and capped at £1m from 2026 with some concessions for IHT discounted to 20% for some business and agricultural interests.
- Unused pension funds will be included in the estate for IHT from April 2027.
- There is talk of the 7-year gifting rule being extended to 10 years in the Autumn Budget 2025.
That said, we all still have nil rate band allowances up to £500,000 each, meaning a married couple/civil partnership could have an inheritance tax combined of £1m on 2nd death if on 1st death, no allowances were used e.g., if all assets were gifted to the surviving spouse. You are also still able to make £3,000 gifts as part of your annual gifting allowance, wedding gifts, unlimited £250 gifts to different individuals, gifts that fall out of the estate calculation after 7 years and also the ability to make gifts from normal income (provided you have a surplus income after expenses have been deducted.
We have already tackled ways to protect business assets as well as how to plan for when unused pensions funds become part of the estate for IHT but there will always be estates that are subject to IHT and an overlooked, but very simple way to protect estates from IHT.
Whole of Life Insurance in Trust
- A Whole of Life assurance policy is guaranteed to pay out the sum assured on death provided premiums are maintained.
- The sum assured should match or exceed any IHT liability.
- The life policy should be written in trust so that it pays out directly to the beneficiaries and is therefore outside the estate and not subject to IHT, giving the beneficiaries a lump sum to settle any IHT bill.
- Monthly or annual premiums are considered a gift for IHT purposes. Therefore:
- Premiums (as gifts) remain within your estate for 7 years but
- If the premium is below £3,000 pa (£250 pm), these could be used in conjunction with your £3,000 annual gifting allowance meaning they are immediately outside your estate.
- If premiums are higher that £3,000 pa (£250 pm), e.g., £300pm, provided the extra £50 pm is a gift from surplus/excess normal income than it is also immediately outside your estate.
Think of Whole of Life Policy as an Investment
For example, looking at the following sample £300 pm premium quotes (unisex rates, guaranteed whole of life cover, premiums increase by 2.5% pa)
- Age 50, non-smoker, £300pm premium, sum assured = £791,505.
- Age 60, non-smoker, £300pm premium, sum assured = £427,577.
- Age 70, non-smoker, £300pm premium, sum assured = £190,090.
- Age 80, non-smoker, £300pm premium, sum assured = £70,009.
So, for a 60-year-old, dying at 90 years old, total premiums over 30 years would be around £150,000 but the pay out sum assured would be £427,000.
For an 80-year-old, dying at 90 years old, total premiums over 10 years would be around £40,000 but the pay out sum assured would be £70,009.
Both you and your beneficiaries may consider starting a whole of life policy with even the beneficiaries paying the premiums as it may be beneficial as a tax-free lump pay out to cover IHT liabilities as well as a guaranteed ‘investment’.
