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UK life insurance & inheritance tax, explained

Life insurance that pays out tax-free?

Simple steps to keep your money in your family's hands

See if your payout could be taxed How to find an adviser

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FROM APRIL 2027 Most unused pensions will start to count towards inheritance tax, making how life cover is held more important to understand.

Will the taxman take a slice of your life insurance?

Answer two quick questions to see whether your payout could be caught by inheritance tax, and how much writing it in trust could save your family.

Enter your figures and press Check my result to see if your payout could be taxed.

Estimate only, based on the standard £325,000 tax-free allowance (the "nil-rate band"). It assumes you are leaving your estate to family other than a husband, wife or civil partner (gifts to them are usually tax-free), and it does not include the extra home allowance or other reliefs. This is general information, not advice.

Which type of insurance pays out tax-free? What is a trust? How to use a trust

5 actions to get tax-free life insurance

A life insurance payout is usually free of income tax and capital gains tax, and a few simple steps when you take out a policy can help keep it that way, out of reach of a 40% inheritance tax charge. Here's what to do.

1

Ask your broker about writing it in trust

Writing the policy in trust keeps the payout out of your estate, so anything above the £325,000 nil-rate band isn't taxed at 40%. Insurers usually set up a trust at no cost, so ask before you buy.

2

Check how the 2027 change affects you

From April 2027, most unused pensions start to count towards inheritance tax, so more estates may face a bill. Ask how that affects the cover you need and how it's held.

3

Name the people, not your estate

Directing the payout to named people (usually through a trust) rather than to "your estate" can keep it out of the inheritance tax calculation and pass money directly, without waiting for probate.

4

Couples: ask about two individual policies over a joint one

A joint policy pays out to your partner tax-free, but that money then sits in their estate and can be taxed at 40% on the second death. Two single-life policies, each in trust, can avoid it.

5

Directors: ask about Relevant Life

If you're a company director, a Relevant Life policy can be paid by the company, is usually a tax-deductible expense, and sits outside your estate, often more tax-efficient than paying from taxed income.

A few other tips to consider

  1. Shop around, and consider using an independent adviser before you commit.
  2. Review existing cover if things have changed. Marriage, children, a new home or a business can all mean your current policy no longer fits.
  3. Ask about other types of insurance too, such as income protection, which can help if you're unable to work.

News & guides

Plain-English updates on UK life insurance, trusts and inheritance tax. New articles added regularly.

News

Farming groups press Chancellor to rethink inheritance tax on farms ahead of Budget

26 October 2026

Farming groups are asking Chancellor John Healey to undo changes to inheritance tax on farms and family firms, ahead of next week's Budget. Opposition politicians say there is a "real chance" the changes could be scrapped.

The rules stem from Rachel Reeves' first Budget in 2024, which cut the relief that let farms and family businesses pass to children and grandchildren at a discount. Relief was reduced for business assets above £1 million, and farmers warned it could force families to sell land. Before Christmas the government raised the threshold to £2.5 million, and married couples can combine their allowances to reach £5 million.

Read the full story →

Based on reporting by Yorkshire Post (26 October 2026). Information only, not advice.

More news

News

FCA sets out plan to get more families thinking about life cover

The FCA will work with industry and consumer groups to reach the 58% of UK adults with no life, critical illness or income protection cover.

28 September 2026Read more →
News

Tax receipts rise £16.6bn as speculation grows over capital gains tax

HMRC collected £230.9bn in income tax, capital gains tax and national insurance between April and August, as speculation builds ahead of next month's Budget.

23 September 2026Read more →
News

First regulated "Bitcoin life insurance" launches in Guernsey

A newly licensed Guernsey insurer has launched a whole-of-life bond built to hold Bitcoin directly, a sign that digital assets are edging into mainstream estate planning, albeit with risks and caveats.

21 September 2026Read more →

More guides

Inheritance tax

What the April 2027 pension change means for your family

From 2027, most unused pensions start to count towards inheritance tax. Here's what that could mean, and why life cover held in trust matters more than before.

Guide Read more →
Trusts

Writing a life insurance policy in trust: a simple guide

What "in trust" really means, why it can keep a payout out of your estate, and the questions to ask your broker before you buy.

Guide Read more →
Couples

Single vs joint life cover: the tax difference explained

Why two individual policies can sometimes beat one joint policy when it comes to inheritance tax, and how to weigh them up.

Guide Read more →

View all news & guides →

Talk to an independent, regulated adviser

Trusts, inheritance tax and life insurance depend on your personal circumstances, and the rules can change. We don't give advice or arrange anything, but here's how to find a qualified, independent professional to talk to. It's usually free to have an initial conversation.

Check the FCA register

Confirm any firm or adviser is authorised and regulated before you deal with them.

register.fca.org.uk →
Find a financial adviser

Independent directories let you search for regulated advisers near you and read reviews.

unbiased.co.uk →
For trusts & wills

A qualified solicitor can advise on trusts and estate planning specifically.

Law Society →

These are well-known independent resources, provided for your convenience. We are not affiliated with them and receive nothing for listing them.

Contact us

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We're an independent information resource, so we're always glad to hear from readers. Please note we can't give financial, tax or legal advice or discuss your personal circumstances. For that, see how to find an adviser.

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