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Will my family pay Inheritance Tax on my Life Insurance? 

There are ways to avoid or mitigate any tax liability on death by following some simple steps that won’t cost you anything

A photo of Daniel Sharpe-Szunko, the author

By Daniel Sharpe-Szunko

Published on: 7 September 2021

4 min read

Will my family pay Inheritance Tax on my Life Insurance? 

One of the potential tax liabilities that you might need to think about with life insurance is Inheritance Tax (IHT). 

If you take out life insurance to protect your family, that can also have an effect on your potential tax liability if you die. If your life insurance policy takes you over the IHT threshold then your family might need to pay tax on the pay out, if not dealt with correctly.  

There are ways to mitigate or avoid any inheritance tax liability on death by following some simple steps that won’t cost you anything. 

SUMMARY: If your life insurance isn’t dealt with properly then it can form part of your estate, which means that your family may pay Inheritance Tax on the pay-out. It is possible to reduce or even mitigate any liability by following some simple steps. 

What is Inheritance Tax? 

Inheritance Tax (IHT) is a government levy that is charged based on the value of your estate upon death. Originally known as ‘probate duty’ which was introduced in the England as part of the Stamps Act 1694, applied to personal estates valued above £20. 

Currently, inheritance tax is payable on estates over the value of £325,000 and payable at a rate of 40% over the threshold. 

Note: according to figures from Her Majesty’s Revenue and Customs (HMRC) around 1 in 20 estates in the UK will have inheritance tax liability. 

When does Inheritance Tax apply to life insurance? 

Many of us won’t actually need to think about the potential risks of our life insurance being subject to Inheritance Tax liability. It is however good to understand when this might apply and check to see if it is something you need to consider. 

If your life insurance pays out to your estate, then the proceeds will form part of that and your Inheritance Tax threshold. 

If your life insurance isn’t written in the Trust then your policy will go through the normal rules of probate, and wont be exempt from Inheritance Tax. This means that your life cover can be incuded in your estate and added to the rest of your assets and liabilities. 


Property value – £250,000 

Life insurance benefit – £200,000 

Other assets – £100,000 

Estate is worth (Total value) – £550,000 

Threshold – £325,000 

Inheritance Tax liability = £225,000 x 40% = £90,000 (potentially) 

As you can see from the example above, there is a possible significant liability for anyone that applies IHT to their estate. Your family could end up paying a significant sum in Tax on your death which can be avoided or at least mitigated. 

Can I protect myself against Inheritance Tax? 

Overall, your family will undoubtedly have to pay an element of Inheritance Tax on your estate if above the thresholds. 

With life insurance, you can take some very simple steps to ensure that this amount doesn’t form part of your estate and is taxable. Life insurance are not taxable and generally the proceeds should not be either. 

Write your policy in Trust 

The first rule is to make sure that your life insurance policies are written in to a Trust which avoids probate and your estate. A Trust Deed is a very simple document that can be obtained from your insurer and often will be completed by your life insurance adviser. 

Most life insurance advisers will complete these documents for free as part of their sales process. Our life insurance specialists have a FREE Trust Service that will do all of this for you and explain the whole process to you. 

Does life insurance pay the Inheritance Tax on my estate? 

There are life insurance policies that will specifically pay your Inheritance Tax liability on your estate on death. These policies are very specific and will be designed for this purpose if you have any concerns about your family paying Inheritance Tax. 

Two main types of life insurance for Inheritance Tax: 

  • Whole of life insurance is the most common and possibly the most cost effective for people as it just guarantees to pay out on death 
  • Gift Inter Vivos policies are specifically designed to cover your potential Inheritance Tax liability for gifts over 7 years as liability reduces 

Writing life insurance into Trust 

One of the main options that you have to quickly and cheaply avoid paying Inheritance Tax is to place your life insurance in Trust. 

A trust is a legal document specifying the person or people who will receive the policy payout (who will benefit). Putting your life insurance in trust is a legal arrangement that allows you to keep this amount separate from your estate. You can also have a trust with most joint life insurance policies (ideal for married couples).

You can place almost all standard life insurance policies in Trust to make sure that your wishes are followed correctly, and your family are protected against Inheritance Tax. You have a number of options available to you when placing your life insurance in Trust, such as the type of Trust. 

Main types of Trust Deeds: 

Get life insurance Inheritance Tax advice 

You should speak to a qualified Tax Expert to get proper tax advice or you can speak to a Life Insurance Specialist for proper insurance advice. This can be especially helpful if you wish to set up a trust for your policy, so you fully understand the process.

Resources – How inheritance tax works

Age UK – Income and tax: Inheritance tax

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