The Legacy Guide to Using Life Insurance to Pay Inheritance Tax

In the UK, Inheritance Tax (IHT) can impose a significant financial burden on the estate you plan to leave behind for your loved ones. Utilising life insurance strategically can help manage or mitigate the impact of IHT, ensuring that your beneficiaries receive the full benefit of your estate without being burdened by a substantial tax bill.

This guide provides insights into how life insurance can be employed effectively for IHT planning.

1. Understanding Inheritance Tax (IHT)

Inheritance Tax is levied on the value of your estate—which includes property, money, and possessions—upon death, if the total value exceeds the IHT threshold of £325,000 for the current tax year.

The tax rate is generally 40% on the amount over the threshold, although reduced rates may apply if you donate a portion of your estate to charity.

2. Role of Life Insurance in IHT Planning

Life insurance can serve as a critical tool in IHT planning. A life insurance policy can be arranged to issue a lump sum to your beneficiaries after your death. If structured properly, this sum can be used to cover the IHT bill or contribute towards it, thus preventing the need to liquidate estate assets to pay the tax.

3. Writing the Policy in Trust

The effectiveness of life insurance in IHT planning hinges on the policy being written in trust. This arrangement ensures that the payout from the policy does not become part of your legal estate and is therefore exempt from IHT. The benefits include direct payment to beneficiaries and swift disbursement without IHT complications.

4. Whole of Life Policy vs. Term Insurance

For IHT purposes, a whole of life policy is more suitable as it pays out regardless of when you die, covering an indefinite period. In contrast, term insurance is less expensive but only covers a specific period, and its efficacy for IHT planning depends on the insured dying within that term.

5. Calculating the Cover Required

It is crucial to collaborate with a financial advisor to calculate the potential IHT liability accurately, considering various factors such as the nil-rate band and any applicable reliefs or exemptions. The life insurance cover should be sufficient to handle this estimated liability, thereby safeguarding your estate’s assets for your intended beneficiaries.

6. Review Regularly

Life insurance policies and estate values should be reviewed regularly, particularly after significant life events or legislative changes affecting IHT. This ensures that your life insurance coverage remains aligned with your estate planning needs and adequately protects your beneficiaries.

7. Seek Professional Advice

Due to the complexities and evolving nature of IHT legislation, seeking professional advice from an estate planner or financial advisor is recommended. They can provide guidance tailored to your specific situation, ensuring compliance with the law and optimising your estate planning strategy.


When employed with careful consideration, life insurance is an invaluable component of estate planning, capable of mitigating the impacts of Inheritance Tax. Effective planning involves early preparation, consistent review, and consultation with professionals. To explore how life insurance can enhance your estate planning, consider reaching out for tailored advice.

For personalised guidance, book your FREE discovery call with us to ensure your legacy is preserved efficiently for your loved ones.


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