Recent Government changes to Inheritance Tax (IHT) rules will affect individuals aiming to pass wealth efficiently to the next generation.
Announcements in the Autumn Budget will soon impact farmers, business owners, and non-domiciled individuals alike, creating fresh challenges when it comes to preserving estates.
What is changing?
From April 2026, Agricultural Property Relief (APR) and Business Property Relief (BPR) will be limited to a combined £1 million cap.
Any eligible assets exceeding this limit will face a new 20 per cent IHT charge.
For non-domiciled individuals, major reform arrives even sooner.
From April 2025, the IHT regime will become residence-based, meaning long-term UK residents will be taxed on their worldwide assets, regardless of domicile.
These reforms will likely increase the IHT exposure of many estates.
One practical way to help mitigate this is by writing a life insurance policy in trust.
What is a trust, and how does it apply to life insurance?
A trust is a legal arrangement in which assets are held by trustees for the benefit of named beneficiaries.
When it comes to life insurance, this means the policyholder can ensure that the policy proceeds are paid directly into the trust when they die. This keeps the payout separate from their taxable estate.
Why use a trust for life insurance?
Without using a trust, any life insurance payout is considered part of the deceased’s estate.
This increases the estate’s value and could result in a higher IHT bill.
However, writing the policy in trust offers distinct advantages:
- The proceeds are excluded from the estate, meaning they are not subject to Inheritance Tax.
- The funds can be accessed quickly by beneficiaries without the delay of probate.
- It provides liquidity to cover any IHT liability, avoiding the need to sell assets like property or shares.
Types of trusts available
The right type of trust depends on individual circumstances:
- Bare trusts have fixed beneficiaries and offer simplicity.
- Discretionary trusts allow trustees to decide how and when to distribute funds, providing flexibility.
- Flexible trusts offer a combination of both approaches, with a default beneficiary and the ability for trustees to make adjustments.
Covering gifts and changes for non-domiciled individuals
A life insurance policy in trust can also protect against IHT liabilities linked to gifts made within seven years before death.
If taper relief applies, the policy payout can cover any unexpected tax charge.
Similarly, for non-doms facing the upcoming residence-based system, placing a life policy in trust can ensure beneficiaries are not burdened with extra tax on global assets.
What should you consider before setting up a trust?
Once a life insurance policy is written in trust, the policyholder no longer has direct control.
The legal ownership lies with the trustees, and any changes to the policy will require their agreement.
While discretionary trusts may fall under the relevant property regime, meaning periodic or exit charges could apply, life insurance policies typically have no value during the policyholder’s lifetime, so these charges are usually minimal or nil.
When setting up a trust, we would advise you to speak to our team of professional tax experts, as the structure must be properly drafted to avoid unintended tax consequences or administrative complications.
Our expert advisers are here to guide you through this process and help you find the best solution for your estate. Contact us today for further assistance.