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Tax advisers are urging wealthy Britons to consider life assurance as a way to reduce inheritance tax and help future generations pay the levy, a practice that has until now flown under the radar.
Wealth managers told the Financial Times that they expected “whole of life” cover set up in a trust to become much more popular as a result of chancellor Rachel Reeves’ expansion of the inheritance tax regime in the Autumn Budget.
Life assurance held in a trust means the policy sits outside of the person’s estate and is therefore not subject to standard rate inheritance tax at 40 per cent. Whole of life cover pays out a guaranteed amount of money to beneficiaries upon death and can be used to foot an estate’s IHT bill.
Life assurance covers for an entire life, whereas life insurance is restricted to a set term.
Tax experts said the practice was an “efficient” way to pay IHT, because beneficiaries cannot access most other assets until the executors have probate, before which the IHT bill needs to be settled.
Hazel Bowen, a senior wealth planner at Canaccord Wealth, said this life assurance practice was a lesser-known, “secret” way to mitigate IHT, and that the changes to the tax regime in the Budget had been “fairly seismic”.
As life assurance was “a standalone contract with you and the provider, it will not be impacted by future Budget announcements or tax changes”, she added.
Ian Dyall, head of estate planning at wealth manager Evelyn Partners, said life assurance helped “get around the cash flow issue” when the policyholder’s beneficiaries are met with the tax bill.
“It’s definitely increasing in importance in advisers’ minds,” he added. “We’re doing a lot more training around it.”
In her October Budget, Reeves announced that unused pension pots would be included in estates from April 2027 and subject to IHT. She also set out a crackdown on loopholes in the regime that mean some landowners would be hit with a 20 per cent levy from next spring.
From April 2025, wealthy foreigners who have been in the UK for more than 10 of the past 20 years face paying IHT on their worldwide assets, plus a period of exposure to the levy even after they have left the country.
Catrin Harrison, senior associate at Charles Russell Speechlys, a law firm, who advises clients on trusts and estate planning said: “Insurance brokers are inundated with new clients at the moment and are racing against the clock to get cover in place before the April tax changes.”
Many of her clients who have decided not to leave the UK immediately, despite recent reforms to the non-dom regime, were using life assurance to mitigate the potential risk of an unexpected inheritance tax liability.
“The life insurance companies are one of the winners from the changes to the non-dom regime,” added Tim Stovold, head of tax at Moore Kingston Smith, an accountancy firm. “The fear of losing a chunk of the family’s wealth to IHT is dealt with by insuring the problem away”.
Paying monthly premiums on a life assurance policy also reduces the amount that would otherwise be left in the estate and ultimately subject to the 40 per cent IHT rate.
Dyall said Reeves was “unlikely” to crack down on the practice because “it is an efficient way to pay the tax and so the government is getting its money. It also means people are free to do with their money as they wish knowing that, upon death, there’ll be money to pay the IHT bill.”
Ian Cook, a chartered financial planner at Quilter Cheviot, said that life assurance in trust would “definitely spring back into vogue” as a result of Reeves changes to the IHT regime around pensions and agricultural land.
“I’m going to be encouraging clients to look at taking life insurance, more so than ever before,” he added.
The Treasury did not immediately respond to a request for comment.
