Life Insurance in Trust UKWhy It Matters & How to Set It Up

Writing life insurance in trust means transferring ownership of the policy from you to a trust. When you die, the payout goes to the trust (and then to your beneficiaries) rather than to your estate. This has two major advantages:

First, the payout is outside your estate for inheritance tax purposes. The current IHT threshold (nil-rate band) is \u00a3325,000, frozen until 2030. Anything above this in your estate is taxed at 40%. A \u00a3300,000 life insurance payout that goes through your estate could cost your family \u00a3120,000 in IHT.

Second, the payout bypasses probate. According to Reassured, trust payouts are typically made in days rather than the 6-12 months probate can take.

From April 2025, Dodd Wealthcare notes that domicile and deemed domicile rules have been replaced by a new long-term UK resident system, bringing more non-UK assets into the IHT net. This makes trust planning even more important for those with international connections.

Trust arrangements are also essential for business protection policies:

• Relevant life insurance — Always written in a relevant life trust. This keeps the payout outside the employee's estate. See our relevant life insurance guide.
• Shareholder protection — Written in a business trust alongside a cross-option agreement. See our cross-option agreement guide.
• Key person insurance — Not typically written in trust (the company is both policyholder and beneficiary). See our keyman insurance guide.