Five ways life insurance can help with inheritance tax bills

While we nervously anticipate the next Government budget in November, the Inheritance tax changes already on the cards for April 2026 are going to make a significant difference to the tax burden on families as reductions in property and business reliefs come into effect.

Life insurance, when structured carefully, can be a reliable and flexible tool to help you plan ahead for Inheritance Tax

Here are five ways you can use Life Insurance to safeguard your estate for future generations:

1. Use Term Insurance for Lifetime Gifts
   You can make substantial gifts during your lifetime to try and reduce the IHT burden on your family, but there is a ‘seven-year’ inheritance tax rule that applies to sums over £3000. If you die seven years after a lifetime gift, there is no inheritance tax to pay. If you die within seven years, your beneficiaries are liable for inheritance tax. The tax burden does decrease over time; if you die one year after the gift, your heirs will have a higher IHT bill than if you die six years after the gift. Short-term insurance, known as Gift Inter Vivos polices, can be a great way to facilitate gifts during your lifetime. They are a term life insurance policy designed to last over the critical seven years and cover the potential tax liability on those gifts. The cover tapers down over time, as does the annual premium, mirroring the way IHT liability decreases as the seven years pass.
2. Use Whole-of-Life Cover to Fund Future IHT Liabilities
   A whole-of-life policy pays out whenever you die, providing a guaranteed lump sum to cover IHT. If you place a Whole of Life policy in trust, it ensures your family has immediate funds at their disposal to pay an inheritance tax bill, without selling assets, property, shares, or taking out a loan to cover the bill. The policy settlement can be revised to match expected IHT liabilities, providing clear, predictable protection against shifting tax rules or thresholds. Whole-of-life policies pay out whenever you die, whether at 56 or 106, so annual premiums can be expensive and vary depending on the settlement you are looking for.
3. Place a Life Policy in Trust so it is not included in Your Estate
   Placing a life policy in trust is essential if you want to ensure it is excluded from the value of your taxable estate. IHT is payable in full or in part before Probate is granted (usually within six months of death) and often before your beneficiaries can fully access your financial and property assets. When a policy is written in trust, the settlement goes directly to your chosen trustees and not into your estate, meaning it is typically not included in assets assessed for IHT. This also speeds up payment, giving beneficiaries timely access to funds.
4. Use Insurance to Protect Business or Property Assets
   If you own a business, farmland, or valuable property, life insurance can be critical in preserving those assets for your family. As business or agricultural reliefs are reduced in April 2026, bespoke life insurance can help your beneficiaries with financial liquidity to meet or mitigate these painful IHT changes. This can prevent the need to sell important assets under pressure, protecting the viability of a business or farm and family security by averting the forced sale of a home.
5. Use Life Insurance to Protect Your Partner
   Many of us will consider life insurance when we take out a mortgage -these life policies are designed to protect our partner if we die unexpectedly before the mortgage loan is repaid. This type of term life policy will often expire shortly after the mortgage ends, which means that if you die after the term life policy finishes, your partner will no longer receive a cash lump sum. Receiving a capital lump sum after your partner’s death can be extremely helpful because they may not have immediate access to your assets until Inheritance tax is paid and Probate has been granted. Probate Relief is a cost-effective life policy taken out by one partner to help the surviving partner with financial liquidity by delivering an immediate cash settlement after death.

 Final Thoughts

Tailored life insurance is one of the most adaptable and useful planning tools available to deal with Inheritance tax changes and with unused pensions also being brought into inheritance tax calculations from April 2027 forward planning is essential. Whether used to cover gifts, protect family assets, fund future inheritance tax bills or provide financial liquidity to your family, in the immediate aftermath of your death, life insurance can provide some certainty and flexibility in an uncertain tax environment.

Life insurance works best as part of a wider estate plan. Nuanced life polices working in tandem with a carefully planned succession plan to protect your family. Whichever life policy you opt for, pre-arranging settlements to go into a trust can also broaden your options. The type of trust you choose gives you flexibility in how you protect your heirs and your assets.

For personalised guidance on structuring life cover or combining insurance within wider estate planning, Castleacre Insurance offers independent advice without any obligation. We look for polices that meet your precise requirements, so take the time to talk to us before changes come in next year.

Download our guide Life Insurance and Inheritance