Can I Insure Against Inheritance Tax? Using Life Insurance to Protect Your Estate

Belgravia Capital
May 31
4 min read

If you’ve done the math and discovered your estate could face a large inheritance tax (IHT) bill, you’re not alone.

With frozen tax thresholds and rising asset values, more UK families are looking for solutions.

At Belgravia Capital Wealth Management, one of the most common questions we hear is:

“Can I insure against inheritance tax?”

The answer is: Yes - life insurance is one of the most effective ways to cover a future IHT bill, ensuring your loved ones inherit what you intended, without having to sell assets to pay the tax.

In this guide, we explain how inheritance tax insurance works, which policies are suitable, and how to set them up correctly to avoid HMRC pitfalls.

How Does Inheritance Tax Work?

Before exploring insurance solutions, here’s a quick refresher:

Inheritance Tax is charged at 40% on the value of your estate above the £325,000 nil-rate band.
If your main residence passes to direct descendants, you may benefit from the £175,000 residence nil-rate band, giving individuals up to £500,000 tax-free — or £1 million for couples.
Any value above this is potentially taxable.

So, if your estate is worth £1.5 million and only £1 million is covered by allowances, the remaining £500,000 could be taxed at 40% — that’s £200,000 payable to HMRC.

This is where insurance can come in.

Can I Use Life Insurance to Pay Inheritance Tax?

Yes - a whole-of-life insurance policy can be used to cover the IHT bill, ensuring your beneficiaries don’t have to sell property or assets to raise the funds.

Here’s how it works:

You take out a whole-of-life insurance policy (not term life).
The policy is written in trust - so it’s not part of your estate and not subject to IHT.
When you die, the payout goes directly to your beneficiaries or trustees.
They use the lump sum to pay the IHT bill.

Why Use Insurance to Cover IHT?

Preserve property: Your heirs won’t need to sell the family home or investment assets.
Liquidity: Estates often include illiquid assets like property or shares — insurance provides immediate cash.
Certainty: You know your IHT bill will be covered.
Control: Combined with trust planning, you can manage how and when wealth is passed on.

What Type of Life Insurance Do I Need to cover Inheritance Tax?

Whole-of-Life Policy

Covers you for your entire lifetime, not just a fixed term.
Guaranteed payout upon death - ideal for IHT planning.
Premiums are usually fixed or reviewable.

Joint Life Second Death Policy

For married couples or civil partners.
Pays out when the second partner dies - which is when IHT is typically due.
Lower premiums than two single policies.

Why Must a Whole of Life Policy Be Written in Trust for IHT purposes?

If the policy is not written in trust, it will be paid into your estate - and become subject to inheritance tax, defeating the purpose.

Writing the policy in trust ensures:

Fast payout (no need to wait for probate)
No IHT on the payout
Clear control over who receives the money

This step is essential and should be done with professional guidance.

How Much Insurance Cover Do I Need to Protect my Family from Inheritance Tax?

The required cover depends on your estimated IHT liability. This can be calculated by:

Valuing your total estate (property, savings, investments, business assets, etc.)
Subtracting the applicable IHT allowances (nil-rate and residence bands)
Applying the 40% tax rate to what’s left

This figure gives you a target for the insurance policy’s payout. The policy can be reviewed and adjusted over time as your wealth or family circumstances change.

How Much Does a Whole of Life Policy to Cover IHT Cost?

Premiums depend on:

Your age and health
The amount of cover required
Whether it’s single or joint policy
Policy structure (fixed or reviewable premiums)

For example, a healthy 60-year-old might pay around £200–£300/month for £500,000 of whole-of-life cover.

While this is a long-term cost, it can be significantly cheaper than losing hundreds of thousands, even millions, to IHT.

When Should You Take Out a Policy to Cover IHT?

The earlier, the better: premiums rise with age.
Especially relevant once your estate exceeds £1 million (or £500,000 if single).
Ideal for families with property-rich, cash-poor estates - where selling assets could be problematic.

Are There Other Uses for Life Insurance in Estate Planning?

Yes. It can also be used to:

Equalise inheritances (e.g. give cash to one child while property goes to another)
Cover capital gains tax on certain assets
Provide funds to settle debts or liabilities outside the estate
Facilitate cross-border estate planning

How Belgravia Capital Wealth Management Can Help with Insuring against Inheritance Tax

At Belgravia Capital, we advise high-net-worth families on comprehensive IHT planning - including the strategic use of insurance.

We help you:

Calculate your IHT exposure
Select the right policy and level of cover
Work with trusted insurance providers
Structure the policy in trust for full tax efficiency
Integrate insurance into your broader financial and estate plan

Whether you’re preserving property, gifting assets, or protecting your legacy - we provide tailored advice that works.

Conclusion: Can You Insure Against Inheritance Tax?

Absolutely. Life insurance, when set up correctly, offers a practical and powerful solution to cover IHT - protecting your assets and ensuring your family inherits in full.

Want to explore how insurance can safeguard your estate?