Can I Insure Against Inheritance Tax? A Practical Guide to Protecting Your Legacy

When planning to pass on wealth, few things cause more concern than the thought of Inheritance Tax (IHT) eroding your legacy.

At a standard rate of 40% on estates above the nil-rate band, IHT can significantly reduce what your loved ones receive - especially if your estate includes property or other illiquid assets.

Naturally, many people ask us at Belgravia Capital Wealth Management:

“Can I insure against inheritance tax?”

The answer is: yes - in fact, it’s one of the most practical and effective ways to protect your estate, provided it’s structured properly.

In this comprehensive article, we explain how life insurance can be used to cover IHT, what types of policies work best, how to use trusts to keep the payout tax-free, and when this strategy makes sense.

Understanding Inheritance Tax in the UK

Inheritance Tax is payable on the value of a deceased person’s estate above a certain threshold. As of 2025, the tax-free allowances are:

• £325,000 Nil-Rate Band (NRB) per person

• £175,000 Residence Nil-Rate Band (RNRB) if leaving your main home to direct descendants

For a married couple or civil partners, these can be combined to pass on up to £1 million tax-free. Any value above this is taxed at 40%.

For high-net-worth families, property owners, or individuals with significant savings and investments, the potential tax bill can be in the hundreds of thousands.

Can IHT Be Covered with Insurance?

Yes. Life insurance can be used to pay Inheritance Tax, either directly or by reimbursing your beneficiaries.

But there’s a catch: if you don’t set it up correctly, the insurance payout may be included in your estate - making the tax problem even worse. That’s why it’s critical to understand how to structure it.

The Role of Life Insurance in IHT Planning

When used properly, life insurance is a tool that ensures your family won’t be forced to:

• Sell property quickly to pay tax

• Drain savings accounts

• Borrow against inheritance

• Delay probate while funds are gathered

Instead, an insurance payout can be used to settle the IHT bill immediately, giving your loved ones access to the estate with minimal disruption.

Types of Life Insurance Policies for Inheritance Tax

1. Whole of Life Insurance

• Covers you for your entire life

• Guarantees a payout upon death, whenever that occurs

• Ideal for IHT planning, because the tax liability is certain

This is the most common and effective option for covering IHT.

Premiums are typically fixed for life (or a limited payment term), and the policy pays out tax-free if written in trust.

2. Term Life Insurance

• Covers you for a set period (e.g. 10, 20, or 30 years)

• No payout if you die after the term expires

• May be used to cover temporary IHT risks (e.g. gifts made within 7 years)

If you’ve made large lifetime gifts and are within the 7-year PET (Potentially Exempt Transfer) window, term insurance can cover the IHT liability if you die before the 7 years are up.

Why the Policy Must Be Written in Trust

Here’s the most important part: a life insurance policy used to cover IHT must be written in trust.

If you don’t do this:

• The payout becomes part of your estate

• It increases the IHT liability

• Probate may delay access to the funds

By writing the policy “in trust”:

• The payout doesn’t form part of your estate

• The money can be paid directly to beneficiaries or HMRC

• It bypasses probate and is usually paid out faster

There are several types of trusts available - most commonly discretionary trusts or bare trusts - and choosing the right one depends on your personal circumstances.

How Much Cover Do You Need?

The cover amount should match your estimated IHT liability.

Start with:

1. The total value of your estate (property, savings, investments, pensions, personal possessions)

2. Subtract any available nil-rate bands and reliefs

3. Multiply the remainder by 40% (or 36% if 10%+ is left to charity)

That gives you a rough IHT bill.

Example:

• Estate value: £2.1 million

• Combined allowances: £1 million

• Taxable estate: £1.1 million

• IHT liability: £440,000

You might take out a £440,000 whole-of-life policy in trust to cover this amount.

Who Should Pay the Premiums?

There are two main options:

• You pay the premiums yourself from your taxed income

• Your beneficiaries or a trust pays the premiums using regular gifts out of income (which may also fall outside your estate for IHT)

This is another area where advice is key — particularly if your premiums are substantial or paid for by a third party.

What About Joint Policies for Married Couples?

Many couples use joint life, second death policies. These:

• Cover both spouses

• Pay out on the second death (when IHT is actually due)

• Are often more affordable than two single policies

This is a popular choice because no IHT is due when the first spouse dies, thanks to the spousal exemption.

What Are the Costs Involved in insuring against Inheritance Tax?

Premiums depend on:

• Age

• Health status

• Amount of cover

• Smoking history

• Policy structure (e.g. fixed or increasing)

As a general guide:

• A healthy 60-year-old might pay £250–£400 per month for £500,000 of cover

• Premiums are cheaper the younger you start

If affordability is a concern, some opt for term insurance to cover the most pressing short-term risk while planning a longer-term strategy.

Pros and Cons of Insuring Against IHT

Pros:

• Provides peace of mind for your heirs

• Ensures estate can be passed on intact

• No need to sell property or liquidate investments

• Avoids probate delays (if written in trust)

• Can be structured around changing tax laws

Cons:

• Premiums can be high, especially later in life

• Must be written in trust to be effective

• Doesn’t reduce IHT — only covers it

• Requires accurate estate valuation and planning

Alternatives to Using Insurance

While insurance is a practical solution, it’s not the only tool in your IHT planning kit. Consider:

• Lifetime gifting (PETs, regular gifts out of income)

• Trusts and family investment companies

• Business or agricultural reliefs

• Charitable legacies

• Downsizing or simplifying your estate

Insurance is best seen as a complement to a full estate planning strategy, not a replacement.

Who Should Consider Insuring against Inheritance Tax Liability?

Insuring against IHT may be ideal for:

• Property-rich, cash-poor families who want to keep the family home

• Business owners who don’t want the firm sold to pay tax

• Individuals who want to pass on wealth quickly and cleanly

• Anyone whose estate value exceeds the IHT threshold and who doesn’t want to rely on asset sales

How Belgravia Capital Wealth Management Can Help you insure against IHT

At Belgravia Capital, we provide:

• Personalised IHT liability assessments

• Independent advice on life insurance policies

• Trust structuring and setup

• Integration of insurance with broader estate planning

• Ongoing reviews to adapt to life changes and tax reforms

Our goal is to protect your legacy while giving your family peace of mind.

Conclusion: Can You Insure Against Inheritance Tax?

Absolutely - and for many families, it’s one of the smartest steps you can take. With a well-structured, trust-based life insurance policy, you can ensure your heirs aren’t burdened with a hefty tax bill, probate delays, or forced asset sales.

But like any financial solution, it only works if it’s tailored to your estate, your goals, and your family situation.

Ready to explore how insurance could protect your legacy?

Contact Belgravia Capital Wealth Management at contact@belgraviacapital.co.uk for expert, independent advice on inheritance tax protection.