Growing inheritance tax burden drives families to insure against future bills

Ian Dyall, Head of Estate Planning at wealth management firm Evelyn Partners, says:

‘It is often said that inheritance tax is hated by the many and paid by the few – but that is set to change.

‘The tightening of inheritance tax rules and reliefs will draw thousands more families into the scope of this contentious levy over the coming years. Together with the long-term freeze on nil-rate bands and gifting exemptions, this means not only that more estates will become liable for IHT, but also that more assets within liable estates will become taxable.’

The Office for Budget Responsibility forecasts that around 1 in 10 deaths are projected to be subject to IHT by 2029/30, a significant increase from the 4.6% of deaths that paid IHT in 2022-23.[1] IHT receipts will reach £9.1 billion in the current 2025–26 tax year, but by 2030/31 – the ongoing period when nil-rate bands remain frozen – annual revenue is projected to rise to £14.5 billion, a 67% increase over five years.

Ian continues: ‘Expanding IHT liabilities are driving more families to take out insurance against a future tax bill so it does not become a burden to their beneficiaries.

‘Good estate planning can very effectively hold back the incoming tide of death duties, with a combination of reliefs, gifting and trusts being commonplace features of a strong strategy. But as the screw is being turned on reliefs and exemptions, more families and their advisers are now reaching for the security of insuring against the IHT liability.’

Total life insurance premiums surged by 18% in the 2024/25 tax year, according to one report, which attributed this partly to growing interest in covering IHT liabilities.[2]

Dyall adds: ‘Our Protection team, who source these policies, say that all providers offering whole-of-life cover reported a significant increase in sales last year.’

Peace of mind

Ian continues: ‘Most people think of life cover as providing an emergency cash fund for loved ones to pay the mortgage and family expenses in the event of death, helping to relieve the stress of bereavement. It can offer financial stability and comfort when a partner dies unexpectedly and when few liquid assets are available to replace lost income – and it can even prevent the forced sale of the family home.

‘Homes have often been sold in the most distressed circumstances to pay unexpectedly large IHT bills, and more families are looking at life cover to address a future IHT problem, especially where tax planning has reached its limit and a significant bill will land on beneficiaries at death.

‘That has always been the case, but life insurance has become increasingly useful in recent years as nil-rate bands have remained frozen while asset prices – particularly property – have soared. And it is only becoming more important as exemptions and reliefs are whittled down, making it more difficult for tax planning alone to protect assets.’ 

Narrowing reliefs and exemptions

Ian says: ‘The long-term freeze of both the IHT nil-rate band of £325,000 and the residence NRB of £175,000 is only the start of the story when it comes to growing IHT liabilities.

‘This April, combined Business and Agricultural Property Relief (BPR/APR) will be limited to £2.5 million, posing immediate challenges for business owners. Tax‑efficient succession planning might only protect the business against part of a future IHT liability, and life cover can play a key role in securing a family business and the jobs it provides.

‘Then, in April 2027, unspent pension assets will be included in estates for IHT calculations, raising the prospect of substantial tax bills at death for people who have built up significant defined contribution pots. This will be especially relevant where available NRBs are used up by other assets such as the family home.’

Retaining access to assets

Ian says: ‘One of the challenges with ramping up gifting is not just that gifts could still be taxable if you do not survive seven years, but also that for gifts to be effective you must surrender all interest and not benefit from them afterwards.

‘This can understandably leave some elderly savers feeling unsure about offloading large parts of their estate. We always advise those considering significant gifting to think first about themselves, their plans, and their ongoing financial needs. Trusts can play a key role in easing these concerns, and so can life cover, as it should allow you to retain ownership of more assets while removing the IHT headache.

‘It is even possible to insure against the potential tax on gifts that fall foul of the seven‑year rule.’

Administrative burden

Ian says: ‘Finally, there is the administrative burden of IHT on executors and administrators –who are often family members and / or beneficiaries themselves - to consider. Probate cannot be granted before IHT is estimated and paid, which can present a catch‑22 situation for administrators if there are not enough liquid assets to pay the tax. IHT must also be paid within six months of death.

‘Both these restrictions can place stress on executors or administrators, and a major benefit of having life insurance in place to cover an IHT bill is that it should pay out quickly after death and be available before probate is granted, dispelling these concerns. The six‑month deadline will become more challenging when personal representatives must deal with pension funds from next April, adding further appeal to the idea of having a life policy in place.

‘That said, premiums for whole-of-life cover can be high and will not be suitable in every case. It is also essential to choose the right policy and to put it into trust so that the payout does not form part of the taxable estate.’

How life cover can work

Dyall says: ‘In practical terms, the most common way a life policy is used to mitigate IHT is through a whole-of-life policy written in trust. The cover is designed to match the expected IHT exposure after reliefs and exemptions, and is often used alongside steps to reduce liability, such as lifetime gifting.

‘Premiums are paid during lifetime, and because the policy pays out on death whenever that occurs, the family has the security of knowing that funds will be available to pay the tax bill when it arises, preventing any forced sale of assets. The policy should be written in trust so that the payout sits outside the estate and does not itself increase the tax liability.

‘If you are married or in a civil partnership, then a “joint life, second death” policy is usually best. Both lives are insured, but because assets pass free of IHT between spouses at first death, the policy only pays out to beneficiaries on the second death.

‘It is also important to note that whole of life comes in two forms, guaranteed and reviewable. With guaranteed policies, the premium you pay at outset never changes, so if you pay that premium until death, the sum assured will pay out. With reviewable policies the insurer will re-evaluate the holder’s situation in the future, and at that point you may get asked to pay more to maintain the same sum assured or have the sum assured reduced.

‘Guaranteed policies are much more expensive but you should know – especially with cash-flow modelling - that you will always be able to afford them, as long as you can at the start. We have seen some reviewable policies where the premiums have gone up sixfold.

‘All in all, the role of insurance in estate planning is not to remove tax, but to make a known liability manageable and predictable.’

Costs

Dyall says: ‘Of course, there are costs involved with a whole‑of‑life policy and arranging a trust, and premiums can be expensive, especially as the life assured ages. It is important that this cost is properly weighed against the IHT benefit, ideally through comprehensive cashflow modelling.

‘It can help to think of whole‑of‑life cover not so much as an insurance policy but as an “investment” for your estate, given that death, the tax bill and the payout are all guaranteed. You can plan for the outlay on estimated premiums through your life expectancy and consider that against the future payout.

‘It is also important to note that policies are subject to medical underwriting, and not everyone can get cover. Life insurance is often left too late, when age, health or timing can make cover unavailable or prohibitively expensive. Underwriting takes time and delays are common, so we encourage clients to consider life cover for IHT early, so they are not forced into rushed decisions at a challenging time.

‘Given the forthcoming inclusion of unspent money‑purchase pension assets in IHT calculations from April 2027, some clients are choosing to fund premiums by drawing on their pensions. But policies must be sustainable: if affordability pressures mean a policy must be cancelled early, the premiums paid will have been wasted.

‘As for the size of premiums, they vary substantially depending on age, health and sum insured. Prices appear stable and, in some instances, are even coming down as providers compete for market share in the growing whole‑of‑life and joint‑life‑second‑death policy market. At least one insurer has also relaxed its entry age limit.’

For a healthy 50‑year‑old client seeking guaranteed cover of £1.4 million to meet his estimated IHT liability after the April 2027 pension changes, Evelyn Partners recently calculated a monthly premium of £1,250.

Dyall adds: ‘This sounds a lot, but he would need to reach his 143rd birthday before the cumulative value of his premiums exceeded the sum insured.’

Insuring against potential IHT on lifetime gifts

Ian says: ‘Life cover can also be used tactically to support larger lifetime gifts, which are subject to the seven‑year rule and could therefore still be taxable if the donor dies within this period – a cost that could fall solely on the beneficiary.

‘Term insurance, rather than whole‑of‑life cover, is the tool of choice here. If the gift will be eligible for taper relief, you can choose for the payout to decrease over the years (as with other decreasing term policies), and multiple staggered term policies can be put in place.[3] These will be far cheaper than whole‑of‑life cover.[4]

‘One of our clients gifted his son £500,000 to buy a property. This was £175,000 above the individual nil-rate band of £325,000, creating a potential IHT liability for the recipient if his father died within seven years. We arranged a seven-year term policy where the payout reduced over time in line with IHT taper relief.

‘However, if an individual makes a large gift below the £325,000 nil-rate band, it will not be eligible for taper relief. If you gifted £200,000 and died six years and 364 days later, the entire sum would still be included in your estate, increasing IHT liabilities, so any cover would need to reflect the full value.’

Ian concludes:

‘Life cover does not replace good planning – it supports it by dealing with the elements that planning cannot fully remove and by creating certainty. The better the underlying planning, the smaller the amount of life cover required and the more manageable the premiums become.’

NOTES 

[1] Modelling by the OBR shows the number of deaths subject to IHT is set to increase from 35,900 in 2026-27 to 50,500 in 2027-28. This is forecast to further increase to 54,300 in 2028-29, 58,100 in 2029-30 before reaching 63,100 in 2030-31. 

[2] According to TWM Solicitors, the total value of life insurance sales rose to £447m in the year ending 31 March 2025, up from £378m the previous year. 

[3] IHT Taper Relief reduces inheritance tax on gifts made 3–7 years before death when total gifts exceed the £325,000 nil‑rate band. The tax reduces as follows: 32% (3–4 years), 24% (4–5 years), 16% (5–6 years), and 8% (6–7 years). 

[4] Specialist “gift inter vivos” policies are also available.