Inheritance tax (IHT) used to be seen as a concern only for the wealthy. That is no longer true. With thresholds frozen and asset prices rising, more ordinary families are drawn into the net each year: and HMRC collected a record £8.2 billion in IHT in the 2024/25 tax year. The Office for Budget Responsibility expects receipts to keep climbing towards roughly £14.5 billion by the end of the decade. The right planning can reduce the burden on your beneficiaries, and one of the most practical tools is a life insurance policy written in trust.

How inheritance tax works

IHT is charged at 40% on the value of your estate above the nil-rate band, which has been fixed at £325,000 since 2009. If you leave your main residence to direct descendants, the residence nil-rate band can add up to a further £175,000. Because any unused allowance passes to a surviving spouse or civil partner, a married couple can potentially pass on up to £1 million before IHT applies. Transfers between spouses and civil partners are themselves exempt, and the rate falls to 36% if you leave at least 10% of the net estate to charity.

Why more estates are being caught

The thresholds above are frozen until at least April 2031. As house prices and investments rise while the allowances stand still, more estates drift over the line: an effect known as fiscal drag. The OBR estimates that close to one in ten estates could face an IHT bill by the end of the decade, up from a much smaller share historically. Rising property values in particular mean families who never considered themselves wealthy can now exceed the threshold on the value of a home alone.

Changes on the horizon

Two announced reforms will widen the net further. From April 2026, the 100% rates of agricultural and business property relief will be capped at the first £1 million of combined qualifying assets, with relief of 50% above that (an effective 20% rate), and AIM shares will move to a reduced 20% rate rather than full exemption. From April 2027, most unused pension funds (currently outside the estate) will be brought within IHT. For anyone who has treated a pension as a way to pass on wealth, that is a significant shift: on death after age 75, the combination of IHT and the beneficiary's income tax can produce a very high effective rate, so reviewing how pensions and other assets are structured is increasingly important.

How life insurance helps

It is important to be clear about what life insurance does and doesn't do here. A policy won't reduce the size of your IHT liability. What it can do is provide a tax-free lump sum (when written in trust) that your beneficiaries can use to pay the bill. That means they don't have to sell the family home, liquidate investments at the wrong moment, or wait for probate before settling what's owed. In effect, you pre-fund the tax through premiums rather than leaving your family to find the full amount.

An illustrative example

Imagine an estate worth £1.4 million for a couple who have used their combined allowances of £1 million. The taxable amount is £400,000, producing an IHT bill of £160,000 at 40%. Without planning, the family might need to sell assets to pay it. A whole-of-life policy for £160,000 written in trust could instead provide that sum directly, leaving the estate intact. This is a simplified, hypothetical illustration to show the principle: your own figures, allowances and reliefs would need to be calculated for your circumstances.

Whole-of-life versus term cover

Unlike term insurance, which only covers a fixed period, a whole-of-life policy has no end date and pays out whenever you die. That makes it well suited to a liability expected to be permanent, such as an IHT bill. Written in an appropriate trust, the payout goes directly to your beneficiaries, outside your estate, so it isn't itself subject to IHT. Term cover is cheaper and can still play a role: for example alongside a gifting plan, as described below.

Gifting and the seven-year rule

Giving assets away during your lifetime can reduce your estate, but the timing matters. Outright gifts to individuals (potentially exempt transfers) fall fully outside your estate only if you survive seven years. If you die between three and seven years after the gift, taper relief can reduce the tax due on it. Gifts into most trusts are treated differently again, as chargeable lifetime transfers, which can trigger an immediate 20% charge on amounts above the nil-rate band. A decreasing term policy (often called gift inter vivos cover) can be used to cover the IHT that would fall due if you died within that seven-year window. There are also smaller exemptions worth using, such as the annual gift allowance and gifts out of surplus income.

Spousal exemption and trusts

Because transfers between spouses and civil partners are exempt and unused allowances pass to the survivor, couples have more planning room than single people: but the second death is where the liability usually crystallises. Writing protection policies in trust keeps the proceeds outside your estate and gets money to your family quickly, which is precisely when it's needed.

Where to start

A sensible first step is simply knowing what you're worth: get an up-to-date valuation of your property, savings, investments and pensions. From there you can see whether your estate is likely to exceed your allowances, and by how much. Reviewing your will, ownership structures and beneficiary nominations usually matters as much as buying a policy.

The bottom line

IHT planning has moved from a niche concern to mainstream financial planning, and the coming changes to business relief, AIM shares and pensions make a review more worthwhile than ever. Life insurance is one tool among several: alongside gifting, trusts, charitable giving and careful use of allowances. Because tax treatment depends on your individual circumstances and the rules can change, this is an area where professional advice genuinely pays for itself.