Answers · UK 2025/26
Is life insurance subject to UK Inheritance Tax?
Life insurance payouts paid directly to beneficiaries (via a "written into trust" policy) are normally OUTSIDE your estate for IHT. Without a trust, the payout goes to your estate and is subject to 40% IHT above £325,000 threshold.
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UK life insurance and Inheritance Tax 2025/26. Without trust: life insurance payout goes to your estate. Combined with other assets, it can push your estate above the £325,000 Nil-Rate Band (plus £175,000 RNRB for main home). IHT at 40% applies on the excess. A £200,000 policy + £400,000 home + £50,000 savings = £650,000 estate. Above £500,000 thresholds, £150,000 taxed at 40% = £60,000 IHT bill, much of it from the insurance pot. With trust ("written in trust"): the policy is owned by a trust, not by you. On death, the trustees pay the insurance proceeds directly to your named beneficiaries — outside your estate, no IHT. Same £200,000 example with policy in trust: only £450,000 in your estate; just within Nil-Rate Band + RNRB; no IHT. Almost ALL life insurance providers offer free trust forms. Why people skip it: paperwork-averse, misunderstanding, or forget. The mistake can cost beneficiaries up to 40% of the payout. Caveats: trust written badly (e.g. ambiguous beneficiaries) can cause delays in payout; once in trust, you generally can't change beneficiaries easily; pre-existing policies can be put in trust later. Decreasing-term life insurance (often pairing with a repayment mortgage): always put in trust — typical payout matches mortgage outstanding, beneficiaries clear the loan. Whole-of-life policies: even more important — payout guaranteed.
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This answer is informational only and does not constitute financial, tax or legal advice. Figures are for the 2025/26 UK tax year. See our methodology and sources.