Should I put my life insurance in trust to avoid inheritance tax?

Full answer

A life insurance payout is normally paid to your estate when you die. If your estate (including that payout) exceeds your available Inheritance Tax (IHT) thresholds, the excess is taxed at 40%. Writing the policy 'in trust' changes who legally owns the payout: the money goes to the trust for your chosen beneficiaries rather than into your estate, so it falls outside the IHT calculation entirely. Why this matters: for 2026/27 the nil-rate band is GBP 325,000, plus a residence nil-rate band of GBP 175,000 where a home passes to direct descendants. A large life policy can easily push an otherwise modest estate over these frozen thresholds. Worked example: an estate worth GBP 300,000 sits within the nil-rate band and pays no IHT. Add a GBP 200,000 life policy paid into the estate and the total is GBP 500,000; the GBP 175,000 above the GBP 325,000 band would be taxed at 40%, a GBP 70,000 bill. Written in trust, that GBP 200,000 bypasses the estate and the IHT charge disappears. Two further benefits: the trust pays out without waiting for probate, so beneficiaries get money quickly when they most need it, and you control exactly who receives it. Most insurers offer a standard trust form free of charge, typically when you take out the policy. Watch points: putting an existing policy into trust can count as a gift for IHT, though term-policy values are usually negligible; the trust is generally irrevocable, so you cannot reclaim the policy; and the decision interacts with your wider estate planning. Use an inheritance tax calculator to see whether your estate is likely to face a charge, and consider advice from a solicitor or financial adviser before setting up or changing a trust.

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