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If your estate is worth more than £325,000, your beneficiaries could face an inheritance tax (IHT) bill of up to 40% when you die. Inheritance Tax Insurance, often arranged using a Whole of Life Insurance policy written in trust, is designed to help cover that liability. The policy pays out a lump sum on your death, providing your loved ones with the funds they need to pay the tax bill without having to sell valuable assets like the family home to pay for it.
This guide explains everything you need to know about Inheritance Tax Insurance: what it is, how it works, whether it’s worth it, and how much it costs.
Inheritance Tax Insurance (also known as IHT insurance) is a policy designed to pay out a lump sum on your death that can be used specifically to settle your IHT bill. Rather than leaving your beneficiaries to fund a potentially six figure tax bill out of their own pockets, or forcing the sale of assets like the family home, the policy payout covers the liability in full.
Most people use Whole of Life Insurance for this purpose, because it’s designed to pay out whenever you die, rather than only within a fixed term like standard Life Insurance.
You won’t pay inheritance tax on your Life Insurance payout if the policy is written in trust. A properly structured policy held in trust sits outside your estate and is paid directly to your trustees, free of IHT.
This is one of the most important things to get right when arranging Inheritance Tax Insurance. If a policy isn’t written in trust, the payout itself forms part of your estate and could become subject to inheritance tax, which defeats the purpose of taking out cover in the first place. It’s also why so many people ask whether you can insure against inheritance tax at all: you can, but only a policy that’s correctly structured in trust will actually keep the payout free of IHT.
When a Life Insurance policy is held in trust, the payout sits outside your estate for inheritance tax purposes. This means:
Writing a policy in trust is generally a straightforward process, but it does carry legal implications, so it’s worth talking this through with your adviser or insurer as part of setting up your cover.
As a single individual, inheritance tax is charged at 40% on the portion of your estate above the nil rate band of £325,000. Various allowances can reduce your bill.
| Allowance | Amount (2025/26) |
|---|---|
| Nil rate band (per person) | £325,000 |
| Transferable nil rate band (married/civil partners) | Up to £650,000 combined |
| Residence nil rate band (passing family home to direct descendants) | £175,000 per person |
| Combined maximum threshold (married couple) | Up to £1,000,000 |
Even with these reliefs, larger estates, particularly those including property, will often still face a significant IHT liability. Inheritance Tax Insurance exists to cover exactly this shortfall.
The most widely used insurance policy for inheritance tax is Whole of Life Insurance. Unlike term Life Insurance, which only pays out if you die within a fixed period, Whole of Life Insurance is guaranteed to pay out on your death, whenever that occurs. This is what makes it ideal for inheritance tax planning and for those looking for Life Insurance in later life. Many people put a Whole of Life policy in place for the following reasons.
One of the main uses of Whole of Life Insurance in inheritance tax planning is to help families meet an inheritance tax liability without disrupting the rest of the estate. If the estate includes valuable but illiquid assets, beneficiaries may struggle to find the cash required to settle the tax bill, and Whole of Life Insurance can provide the liquidity needed to cover those costs instead of selling property or investments.
Insurance against inheritance tax works best when it forms part of a broader financial strategy. Estate planning may involve a combination of:
Insurance complements these approaches by providing certainty around liquidity when the bill falls due.
Many estates are heavily weighted towards property. A family home or investment properties may represent the majority of the estate’s value, and if inheritance tax becomes payable, the sale of these assets can sometimes become unavoidable.
A Whole of Life policy can help prevent this scenario by ensuring cash is available when the estate is settled, allowing property and other long term assets to remain within the family.
Whole of Life Insurance covers an inheritance tax bill in a few simple steps: you take out cover for the size of the expected bill, write the policy in trust, pay the premiums for life, and the payout is used to settle the tax when you die.
Premiums depend on factors including your age, health and the level of cover you need. For a full breakdown of typical costs, see our Whole of Life Insurance guide.
Whole of life policies can be set up in a few different ways. The main choices are:
IHT Insurance premiums tend to be costly because of the guaranteed payout. This is to cover the assured risk to the insurer, because as long as you keep paying the premiums (and don’t otherwise violate the terms of the policy), there’ll be a definite payout at the end (i.e. when you pass away).
Of course, there are a number of different factors that can affect what you’ll pay, such as:
You can dive more into costs in our Complete Guide to Whole of Life Insurance.
Harry turns 60 in 2026. He has an estate worth £750,000, including his main residence, which he plans to leave to his two children.
Harry’s inheritance tax calculation would be as follows:
| Total estate | £750,000 |
|---|---|
| Less nil rate band | –£325,000 |
| Less residence nil rate band | –£175,000 |
| Taxable estate | £250,000 |
| IHT bill 40% | £100,000 |
Harry takes out a Whole of Life insurance policy for £100,000, written in trust. His premium will depend on his age, health and the provider he chooses; see our Whole of Life Insurance guide for typical costs. If Harry were to pass away later in life, say in 2040, the trust would pay out £100,000 directly to his children, who could use it to settle the IHT bill without touching the rest of the estate.
Gifts you make during your lifetime are another situation where Inheritance Tax Insurance can help. Most gifts to individuals count as potentially exempt transfers (PETs). If you live for seven years after making the gift, it falls outside your estate entirely. If you die within that time, it becomes a “failed PET” and is added back into your estate: it uses up your £325,000 nil-rate band first, and only the amount above the band is taxed. Any tax that arises is usually the responsibility of the person who received the gift.
Where a gift does create a tax bill, taper relief can reduce it, but only if you survive at least three years after making it. There is no reduction in the first three years. After that, the rate falls the longer you live, as the table below shows:
| Years between gift and death | IHT rate applied |
|---|---|
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7+ years | 0% |
A Gift Inter Vivos policy is a decreasing term Life Insurance policy designed to track this taper relief. It stays level for the first three years, when the full tax bill could still apply, then reduces from the third year onwards as the liability falls, reaching nil after seven years, when no tax is due. That way, if you die at any point within the seven years, the payout is designed to match the tax due on the gift at that time.
For example, suppose Harry had already used his £325,000 nil-rate band on an earlier gift. He then gives his daughter Joanna a further gift of £250,000, so the whole £250,000 could be subject to inheritance tax if he dies within seven years.
If Harry dies within the first three years, the gift is taxed at the full 40%, so Joanna faces a potential inheritance tax bill of £100,000. Taper relief does not apply in those first three years. From the third year onwards it gradually reduces the tax: the bill would fall to £80,000 between years three and four, and to £20,000 between years six and seven, before disappearing entirely once seven years have passed.
Harry takes out a Gift Inter Vivos policy for £100,000, held in trust, which stays level for the first three years and then reduces in step with the falling bill, reaching nil after seven years. If Harry dies, the payout goes directly to Joanna to cover the tax due.
When taking out Inheritance Tax Insurance, there are several important points to keep in mind.
If a Life Insurance policy is not written in trust, the payout forms part of your estate and is itself subject to inheritance tax, defeating the entire purpose. Writing the policy in trust is generally a straightforward process that your insurer or adviser can help arrange.
Your IHT liability will depend on the value of your estate at the date of death, which may be different from today’s value. It’s important to review your cover periodically, particularly if your estate grows in value, to ensure the policy remains sufficient.
Some Whole of Life Insurance policies have reviewable premiums, which can increase significantly as you age. Guaranteed premium policies cost more upfront but provide certainty over the long term. For inheritance tax planning purposes, many advisers recommend guaranteed premium policies.
Everyone’s estate is different, and the right insurance policy for inheritance tax will depend on your specific circumstances, including the size and composition of your estate, any gifts you have made or plan to make, and your family situation. Specialist advice ensures you get the right level of cover, from the right provider, structured correctly from the outset.
While we can’t advise on your individual inheritance tax affairs, we can put together the most suitable policy to protect against your specific liabilities. Our advice is totally free, you won’t pay us a penny to set up your coverage.
Darren Jaynes
Head of Digital Protection
For most people with an estate above the nil rate band, Inheritance Tax Insurance is worth considering, because it provides the cash your beneficiaries need to pay the bill without having to sell the family home or other assets. Whether it’s worth it for you specifically depends on the size of your likely IHT liability, your health, and how the premiums compare to the value being protected, so it’s worth getting a personalised view from an adviser.
An existing Life Insurance policy can be used for inheritance tax purposes, but only if it is written in trust. If your current policy is not in trust, you may be able to transfer it into trust; speak to your insurer or an adviser about whether this is possible and whether it would have any implications.
The amount of cover you need is equal to your estimated IHT liability. Our Inheritance Tax Calculator can give you a starting estimate, but a specialist adviser will be able to give you a more precise figure based on your full financial picture.
You should review your IHT cover every few years, or whenever there’s a significant change in your estate’s value. It’s possible to top up your existing policy or take out additional cover if needed.
We can’t advise on your individual inheritance tax affairs, but as independent protection specialists we can help you arrange Whole of Life cover, which can be written in trust, to help cover the bill.
We look across the market to find you a suitable policy, and our advice is free: you won’t pay us a penny to set up your cover.
If you’re not sure how much cover you need, or which type of policy suits your circumstances, we’re happy to talk it through. Compare Whole of Life quotes online, or speak to one of our advisers. Call 02084327333 or email help@drewberry.co.uk to discuss your options.
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