Last updated: 14 October 2026
Are life insurance payouts subject to Inheritance Tax?
They can be. If a life insurance policy pays out to your estate, the money is added to the value of your estate and may be taxed at 40% above your nil-rate bands. If the policy is written in trust, the payout goes straight to the beneficiaries, outside your estate, so there’s usually no Inheritance Tax (IHT) on it and no wait for probate. For most people, putting a policy in trust is a simple, low-cost step.
How payouts are treated
| Policy set-up | IHT position |
| Policy in your own name, no trust | Part of your estate; may be taxed at 40% |
| Policy written in trust | Usually outside your estate |
| Joint life, first death, paid to the survivor | Usually free of IHT if spouses, through the spouse exemption |
| Death in service benefit from an employer scheme | Usually paid at the trustees’ discretion, outside the estate |
| Policy to pay a future IHT bill (whole of life in trust) | Outside the estate; funds the tax |
Example
Natalie’s estate is worth £500,000, including her home, which she leaves to her children. She also has a £300,000 term policy in her own name. Without a trust, her estate becomes £800,000. After the £325,000 nil-rate band and £175,000 residence nil-rate band, £300,000 is taxed at 40%, which is £120,000. With the policy in trust, the payout is outside the estate and no IHT is due.
Premiums and gifts
Premiums you pay on a policy in trust are gifts. They’re usually exempt as regular gifts out of normal income, if you can afford them from income without affecting your standard of living, or covered by the £3,000 annual exemption.
Types of trust
- Absolute (bare) trust: fixed beneficiaries, simple but inflexible
- Discretionary trust: trustees decide who benefits, which is flexible. A trust holding only a term policy usually has little or no value until death, so periodic charges are rarely an issue
- Split trust: used with critical illness cover, so you keep any illness payout
Death in service from April 2027
From 6 April 2027, most unused pension funds come into IHT, but death in service benefits from registered pension schemes are specifically excluded.
Using insurance to pay IHT
A whole-of-life policy written in trust can provide money for beneficiaries to pay the IHT bill. A joint life second death policy is common for married couples, as IHT is usually due on the second death.
Review old policies
Many people took out cover with a mortgage years ago and never put it in trust. Check each policy schedule, and ask the insurer whether a trust is in place. If it isn’t, setting one up now is usually free, and it can save your family a large tax bill.
Frequently asked questions
Can I put an existing policy into trust?
Yes, most insurers provide a trust form.
Does a trust payout need probate?
No, the trustees can claim with the death certificate.
Is the payout subject to income tax?
No, pure protection payouts are tax-free.
Can I change the beneficiaries?
With a discretionary trust, trustees have flexibility.
Related: gifting money to reduce IHT, reducing an estate below £2 million and the climbdown on family firm relief.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with Inheritance Tax and life insurance. See our small business accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
