HMRC collected a record £8.5 billion in Inheritance Tax over the 2025/26 tax year, and the trend has been climbing for years as frozen thresholds pull more estates into the tax without any change in the rules themselves needing to happen. The standard rate above the tax-free threshold is 40%, and it falls due within six months of death – often before probate has even finished, and well before a property or other illiquid asset can realistically be sold to raise the money. Life insurance exists to solve exactly that timing problem: rather than your family needing to find cash quickly or sell something at a bad moment, a policy pays out to cover the bill directly.
Why it needs to be written in trust
A life insurance payout only helps with an Inheritance Tax bill if it doesn’t create one of its own. Written in trust, most insurers will do this at no extra cost, either when you take the policy out or afterwards, the payout sits outside your estate entirely, reaches your family without waiting for probate, and isn’t itself subject to the tax it’s meant to help pay. We’ve covered the trust mechanics in more detail in our piece on passing on wealth – the short version here is that a policy not written in trust largely defeats the purpose.
Getting the amount right matters more than having a policy at all
A policy that’s too small still leaves your family short, and one considerably larger than necessary is simply an unnecessary cost. Getting the figure right starts with a proper estate valuation – property, investments, savings, pensions, and anything else of value – set against your current nil-rate band (£325,000) and, where it applies, the residence nil-rate band (up to £175,000) when a main home passes to direct descendants. Married couples and civil partners can generally combine unused allowances, which materially changes the sum for a couple compared to an individual. Whole of life insurance, rather than a policy with a fixed term, is usually the right structure here, since an Inheritance Tax bill can arise at any point rather than within a set number of years.
Why that number is about to move for a lot of people
Here’s the part worth flagging even if you already have cover in place: from April 2027, most unused pension funds will count toward your estate for Inheritance Tax for the first time, under provisions confirmed in the Finance Act 2026. If a meaningful part of your wealth sits in a pension, a policy sized to your IHT position as it stands today may simply be too small once that change takes effect – not because anything about your existing cover has changed, but because the underlying bill it’s meant to cover is about to grow. It’s worth treating this as a prompt to revisit the calculation, not just the policy.
Let’s work out what your family would actually need
We work with clients across Poole, Bournemouth and the wider Dorset area to calculate a realistic Inheritance Tax position and put the right level of cover in place around it, including factoring in changes like the 2027 pension rules before they land rather than after. If you’d like your own position reviewed, get in touch and we’re happy to have a no-obligation conversation.
Find out more about our Inheritance Tax planning services here
This article is for general information only and does not constitute financial or tax advice, which should be based on your individual circumstances. The information is aimed at retail clients only. All information is correct at the time of writing (September 2026) and is subject to change in the future.
Life insurance policies typically have no cash-in value at any time and cover will cease at the end of the term (where applicable) or if premiums stop being paid. Tax treatment depends on individual circumstances and may change in the future.
The Financial Conduct Authority does not regulate trusts, will writing or estate planning.