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Rachel Reeves’ inheritance tax (IHT) grab has led to a surge in the wealthy using life insurance policies to shield their hard-earned cash from the taxman. While it is expensive, life insurance pays out a lump sum on death and policies can be placed in trust.
This means it is outside a person’s estate for IHT purposes and can be used to cover IHT bills. Edward Durrell from life insurance specialist Cover Direct said the firm has seen a huge increase in the number of people enquiring about using life insurance to mitigate against IHT. He estimated enquiries have increased by 100%.
Mr Durrell told The Times: “There are a lot of positives to these policies as it will immediately pay out and cover that IHT bill, meaning there is no need to sell property, or get into difficulties paying it.”
Mike Strutt from the life insurer Risk Assured told the same publication that the Chancellor’s changes had led to a doubling of the number of enquiries his company has received from people looking to take out lifetime insurance policies.
Changes to IHT reliefs and exemptions were among the most controversial reforms announced in Ms Reeves’ maiden Budget last year.
The Chancellor announced changes to agricultural property relief and business property relief which would force estates or companies to pay 20% IHT on assets over £1million from April 2026. They had previously been exempt from IHT no matter the size of their estate. Financial advisers have previously reported a surge in enquiries from farmers about life insurance to cover their IHT bills.
Another change was the decision to tax inherited pension pots. Under the previous rules, if the deceased was aged under 75 at the time of his or her death, unused pension funds could be passed on tax-free.
But under the Chancellor’s plans, inherited pension pots will be considered part of the deceased’s estate and subject to IHT.
This means pension assets could push some estates over the nil-rate band tax-free allowance, resulting in a bigger tax burden.
The standard IHT nil-rate band is currently set at £325,000. This threshold lets estates pass on up to £325,000 tax-free. Any value above this amount is taxed at 40%.
There are three kinds of insurance which can cover IHT liability. These are whole of life policies, “gift inter vivos” policies – which cover specific gifts rather than a person’s entire estate – and term insurance. This last covers set periods often of 10 or 20 years or until the age of 90.
