Why a payout can end up in your estate
When you die, your estate is everything you owned: your home, savings, investments and possessions. If your life insurance pays your estate, that money joins the pile. HMRC then looks at the total to decide whether inheritance tax is due.
This can catch families out. A policy bought to clear the mortgage or support children could push the estate over the tax-free allowance. The result is that part of the money you set aside goes to tax instead of to the people you meant it for.
How a trust changes the picture
Placing your policy in trust means the payout belongs to the trust, managed by trustees you choose, for beneficiaries you name. Because you no longer own the benefit, it generally falls outside your estate for inheritance tax.
There is a practical gain too. Trustees can usually claim with a death certificate and pay the beneficiaries without waiting for probate, which can take many months. Your family gets the money when they need it most.
- The payout usually sits outside your estate
- Trustees can claim without a grant of probate
- You decide who benefits and who manages the money
- Most UK insurers provide trust forms free of charge
Using life cover to pay the tax bill
Some families expect an inheritance tax bill they cannot avoid, often because the family home and savings together are worth more than the allowances. HMRC usually expects some or all of the tax to be paid before the estate can be fully dealt with, which can leave relatives scrambling to raise cash or sell property.
A whole of life policy written in trust can provide a lump sum for that bill. Married couples and civil partners often choose a joint policy that pays on the second death, because assets passing between spouses are usually exempt. The bill tends to arise when the surviving partner dies.
Where the rules get technical
Inheritance tax allowances, exemptions and the treatment of pensions and gifts change over time, and the right approach depends on your assets, your will and your family. Premiums you pay into a trust policy can count as gifts, though regular gifts from surplus income may be exempt. Some trusts carry their own tax rules.
We do not give tax advice. For a large or complicated estate, speak to a solicitor, accountant or tax adviser before you decide how much cover to buy.
How Hi Tomorrow helps with this
We help you choose cover that fits the job, whether that is protecting your family or meeting a likely tax bill. We compare whole of life and term options across our panel and explain how each would work in trust.
Once you are accepted, we help you complete the trust forms with the insurer so the policy is set up correctly from the start. If you need specialist tax or estate planning advice, we will tell you so.