Cover for Inheritance Tax (IHT) – Estate Planning

Life insurance for inheritance tax can help to ensure your next of kin receive the full value of your estate when you die.

Nobody likes paying Tax but it is a fact of life and unfortunately it can also be a fact of death – in the form of Inheritance Tax (IHT) which, is why estate planning makes good financial sense.

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There are certain allowances which currently stand at £325,000 per person (which can be passed to a spouse giving a total of £650,000) but for estates valued above the allowance the difference is taxed at 40%.

The beneficiaries of the estate are responsible for paying the tax. This is why estate planning is essential to find the most cost effective solution to the problem.

A life insurance policy can be a way of ensuring there is sufficient money available to pay the inheritance tax bill and therefore leave the entire value of the estate to the chosen beneficiaries.

For example:

A single person with an allowance of £325,000 and an estate worth £500,000 will leave £175,000 that is subject to inheritance tax at 40%. The beneficiaries will be charged £70,000.


A couple with a total allowance of £650,000 and an estate worth £1,000,000 will leave £350,000 that is subject to IHT. The beneficiaries will be charged £140,000.

If in the above two situations the departed had taken out a life insurance policy for £70,000 and £140,000 respectively, the tax could be paid from the proceeds of the policy and the entire value of the estate would then pass to the chosen beneficiaries.

This combined with wills and trusts makes for sensible estate planning.

Term Assurance would provide cover for a set amount of time (typically 40 years or to age 85)

Whole of Life insurance would provide cover until the death of the policy holder (provided all the monthly premiums are paid).

Couples may wish to take out joint policies which pay out on the death of the second person and so leave the proceeds to the children instead of the surviving spouse.

In order to prevent the policy from adding to the total value of the estate and increasing the tax liability the policy should be written into ‘trust’ which would remove it from the estate but ensure the proceeds are distributed in accordance with the terms of the ‘trust’.

This also means the proceeds of the life insurance policy do not get tied up in ‘probate’ and are paid very quickly to the chosen beneficiaries which means important financial matters such as a funeral or a mortgage can be taken care of.

Most life insurance companies offer help and assistance and the necessary forms to place a policy in trust at no cost but for more complex cases a specialist solicitor may be required.

When it comes to matters of Tax & Estate planning it is always advisable to speak with a qualified specialist with access to a broad range of products and solutions.