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Life insurance trust and inheritance tax, in plain terms

Written in trust, a life insurance payout can reach your family outside your estate for inheritance tax: MoneyHelper says the policy's value is not considered part of it (MoneyHelper ↗).

Without a trust, HMRC says the proceeds form part of your estate where you are the life assured (HMRC IHTM20012 ↗).

This guide sets out the rules and the charges that can still apply.

Every claim here is our summary of a named external source, linked beside it. Sources change: check the wording at the link before you rely on it.

Estate or trust ↓Trust charges →
01 · Your estate

Does life insurance count as part of your estate?

It does if nothing else is arranged.

HMRC's manual says the proceeds are paid to the owner of the policy or someone named under its terms, and where the person insured owned the policy, they form part of their free estate and are taxable on their death (HMRC IHTM20012 ↗).

A trust changes who owns it.

Aviva says a policy in trust is legally owned by your trustees and isn't part of your estate, so it doesn't count towards the £325,000 threshold (Aviva ↗).

MoneyHelper says life insurance can help your beneficiaries pay Inheritance Tax without selling your home or other assets (MoneyHelper ↗).

You are the life assured

Not in trust

Trustees own the policy

Written in trust

Estate
The proceeds form part of your estate (HMRC IHTM20012 ↗)
Not part of your estate (Aviva ↗)
Inheritance Tax
Counts towards the £325,000 threshold; 40% standard rate above it (GOV.UK ↗)
Does not count towards the threshold (Aviva ↗)
Paying out
Paid into the estate, which could take a long time (MoneyHelper ↗)
Can be paid outside probate (MoneyHelper ↗)
Charges
—
Certain trust charges can arise if money stays in trust for a long time (Legal & General ↗)
Swipe to compare

The rules only. We do not work out anyone's Inheritance Tax: reliefs, gifts and the home allowance change the answer, so check GOV.UK or a solicitor or adviser for your own estate.

02 · The numbers

The thresholds and the rate

GOV.UK says there is normally no Inheritance Tax to pay if the estate is below the £325,000 threshold, or if you leave everything above it to a spouse, civil partner, a charity or a community amateur sports club (GOV.UK ↗).

The standard rate is 40% (GOV.UK ↗).

If you give your home to your children or grandchildren, your threshold can increase to £500,000, and the estate can pay a reduced rate of 36% on some assets if 10% or more of the net value is left to charity (GOV.UK ↗).

The threshold£325,000GOV.UK: below this, normally no tax
The standard rate40%GOV.UK: on the part above the threshold
With a home to descendants£500,000GOV.UK: the threshold can rise to this

All three figures from GOV.UK's Inheritance Tax guide (GOV.UK ↗). Check them there: thresholds are set by government and can change.

03 · Premiums as gifts

Premiums, gifts and the 7 year rule

Paying for a policy that someone else owns, which is what happens once your policy is in trust, can itself be a gift.

HMRC says the premium may be a potentially exempt transfer or a chargeable transfer, taking into account any exemption such as normal expenditure out of income (HMRC IHTM20012 ↗).

HMRC also says transferring an existing policy may be taxable as a gift at its value on that date (HMRC IHTM20012 ↗).

GOV.UK sets out the exemptions most people meet.

No tax is due on gifts if you live for 7 years after giving them, unless the gift is part of a trust (GOV.UK ↗).

What GOV.UK says

Annual exemption
£3,000 of gifts each tax year, with one year's unused amount carried forward (GOV.UK ↗)
Regular payments
No limit, if paid from regular income and affordable after your usual living costs (GOV.UK ↗)
Spouse or civil partner
No Inheritance Tax on gifts between them, if they live in the UK permanently (GOV.UK ↗)
7 year rule
Gifts in the 3 years before death taxed at 40%; taper relief from 3 to 7 years (GOV.UK ↗)
04 · Charges on the trust

When a trust can still be taxed

Most property held in trusts counts as relevant property, and Inheritance Tax may be due when assets leave the trust or at each 10 year anniversary (GOV.UK ↗).

GOV.UK says the exit charge is up to a maximum of 6%, and trustees pay a 10 year charge if the trust holds relevant property worth more than the threshold (GOV.UK ↗).

For life policies, the insurers put it mildly.

Legal & General says certain charges can arise if money remains in trust for a prolonged period (Legal & General ↗), and says of its absolute trust that any Inheritance Tax liability is likely to be nil or negligible (Legal & General ↗).

Those are its words; check your own trust with an adviser.

01

Going in

A transfer into the trust

A lifetime gift into most trusts is tested against the threshold, with gifts in the previous 7 years.

02

Every 10 years

The anniversary charge

If the trust holds relevant property worth more than the threshold.

03

Coming out

The exit charge

Up to a maximum of 6% on relevant property leaving the trust, with some exceptions.

Summarised from GOV.UK's Trusts and Inheritance Tax guidance (GOV.UK ↗). The calculations are complex; GOV.UK says so too.

05 · Recent changes

The 2025 IHT changes, and what comes next

From 6 April 2025, GOV.UK's trusts guidance tests whether trust property abroad is excluded from Inheritance Tax by whether the settlor is a long-term UK resident, where it used to look at domicile (GOV.UK ↗).

The next change, in April 2027, is about pensions, and the timeline shows the one exception that matters for life cover (GOV.UK ↗).

Death in service →
25

6 April 2025

Long-term residence replaces domicile

For excluded property in trusts, the test looks at whether the settlor is a long-term UK resident.

27

6 April 2027

Pensions come into the estate

Most unused pension funds and pension death benefits will be brought into the value of an estate. Death in service benefits from a registered pension scheme are excluded.

From GOV.UK's trusts guidance (GOV.UK ↗) and its note on unused pension funds and death benefits (GOV.UK ↗).

06 · Weighing it up

Pros and cons of writing life insurance in trust

Legal & General and Aviva both set out the trade-off in their own guides.

The short version: more control and a faster payout, in exchange for a decision that is hard to undo.

Life insurance in trust →How to put a policy in trust →

Pros

Cons

Tax
The payout often won't count as part of your estate (Legal & General ↗)
Tax may still be due in some circumstances (Legal & General ↗)
Speed
No wait for probate for the policy to pay (Aviva ↗)
Probate may still be needed for other assets (Aviva ↗)
Control
You choose who benefits and who manages it (Legal & General ↗)
Trustees may need to agree to decisions (Legal & General ↗)
Permanence
Your wishes are written down
Handing ownership to trustees can't be reversed (Aviva ↗)
Swipe to compare
07 · For business owners

Run a business? There is a business version

Company schemes have their own trust rules.

HMRC's manual says trusts holding excepted group life schemes are relevant property trusts, and that distributions due to the death of an employee within the first ten years are likely to be taxed at 0% (HMRC ↗).

This site is mainly about cover a company buys, and the cards show who each policy pays.

Key person vs relevant life →
08 · Sources

Check it for yourself

Every claim on this page is our summary of one of the documents listed here.

We last checked them against the live sources on 28 September 2026.

The documents are the authority, not this page.

Insurers and HMRC update them, so validate any figure or condition at its link before you rely on it.

Questions

Trusts and inheritance tax, answered

It can.

HMRC says that where the person insured owned the policy, the proceeds form part of their free estate and are taxable on their death.

Held in trust, the policy is legally owned by the trustees; MoneyHelper says its value is then not considered part of your estate and can be paid outside probate and Inheritance Tax. HMRC IHTM20012 ↗

It depends on your estate.

GOV.UK sets the standard rate at 40% on the part of an estate above the £325,000 threshold, so a payout that takes an estate over the threshold can add tax at that rate if it goes into the estate.

If everything above the threshold goes to a spouse or civil partner there is normally no tax either way.

We do not work out anyone’s tax: take advice for a real estate. GOV.UK ↗

From 6 April 2025, GOV.UK’s trusts guidance uses whether the settlor is a long-term UK resident, rather than domicile, to decide whether trust property outside the UK is excluded property.

Separately, from 6 April 2027 most unused pension funds and pension death benefits will count in the estate, while death in service benefits from a registered pension scheme stay out of scope. GOV.UK ↗

Yes. Aviva says handing ownership to trustees cannot be reversed.

Legal & General says trustees may need to agree to decisions, and that tax charges can still arise, for example if money stays in trust for a long time.

GOV.UK explains the exit and 10 year anniversary charges on relevant property trusts. Legal & General ↗

Death in service comes through the employer’s scheme, and Legal & General describes the benefit as payable at the trustees’ discretion.

HMRC treats trusts holding excepted group life schemes as relevant property trusts.

GOV.UK says death in service benefits from a registered pension scheme are excluded from the 2027 pension changes and will not be in scope of Inheritance Tax. GOV.UK ↗

Beta · information only

Personal cover sorted? See the business side.

If you run a company, the business protection guide sets out what each business policy does and who it pays, from HMRC's manuals and the insurers' own guides.

01Key person, relevant life and shareholder cover

02Who each policy pays, with sources

03No email, no quote, no sales call

Information, not advice

We are not an insurer, broker or regulated adviser, and we do not give quotes or recommend a policy. For regulated advice, use an adviser authorised by the FCA.

Open the business guide →

Takes you to the business protection insurance guide.

Not financial advice. This page is general information. Before buying insurance, the FCA tells consumers to check the firm on its Firm Checker (FCA ↗). For free guidance, see MoneyHelper.