Quick answer · Updated August 2026
Sometimes — and it's entirely avoidable. A payout made into your estate counts toward inheritance tax: 40% applies above the £325,000 nil-rate band (up to £500,000 with the residence band). A policy written in trust sits outside the estate and passes to beneficiaries IHT-free, faster, and without waiting for probate. Trust-writing is free at every major insurer.
How IHT Catches Life Insurance
| Setup | IHT treatment | Speed of payout |
|---|---|---|
| Policy paid to your estate (default) | Counts toward estate; 40% above nil-rate bands | Waits for probate — often 6–12 months |
| Policy written in trust | Outside the estate — no IHT | Direct to trustees, typically 2–4 weeks |
Nil-rate band £325,000; residence nil-rate band up to £175,000 extra when a home passes to direct descendants.
Example: a £300,000 estate plus a £200,000 estate-paid policy = £500,000 — potentially £70,000 of IHT that a trust would have eliminated. Married couples and civil partners get spouse exemption on first death, but trust-writing still speeds payment and protects the second-death position.
Setting it up: tick the trust option at application, or ask your insurer for trust forms on an existing policy — both free. Complex estates should also read our IHT planning guide.
Frequently Asked Questions
Only if it is paid into your estate. Above the £325,000 nil-rate band (up to £500,000 with the residence band), 40% IHT applies. A policy written in trust falls outside the estate and escapes IHT completely.
Tick the trust option when applying, or request trust forms from your insurer for an existing policy. It is free, takes minutes, and also lets the payout bypass probate.
No — transfers between spouses and civil partners are IHT-exempt. Trust-writing still helps by speeding payment and protecting how the money is taxed on the second death.