Families rush to purchase life insurance in order to cover death bills as a result of the inheritance tax raid

Following the Autumn Budget announcement that more assets could be charged, life insurance sales soared last year as families searched for ways to pay inheritance tax bills

Although life insurance sales are skyrocketing as families look for ways to avoid inheritance tax bills, attorneys warn that if the payment plan is not properly structured, it may be worthless.

According to the data, as more estates become subject to inheritance tax (IHT), people are increasingly using life insurance, also known as inheritance tax insurance, to protect their families from future inheritance tax bills. After the policyholder passes away, the payout from the insurance policy is supposed to pay for any subsequent IHT bills.

Financial Conduct Authority (FCA) data shows that the total value of life insurance sales increased by 18% to 447 million in the 12 months ending March 31, 2025, from 378 million in 2023 - 2024.

The increase comes after the 2024 Budget announced an expansion of the assets subject to inheritance tax, which will result in more estates owing IHT for the first time.

The changes will take effect in April 2027, and any unused pensions will be included in the IHT calculations, potentially subject to a 40 percent tax. Many families will be pushed over the 325,000 IHT nil-rate band by the value of these pensions.

Beginning in April 2026, inheritance taxes of up to 20% will be owed on business and agricultural property, including family-owned farms and companies as well as AIM shares.

To prevent expensive tax and probate delays, life insurance policies must be held in trust, according to TWM Solicitors, a private wealth and family law firm that obtained the FCA life insurance data through a Freedom of Information (FOI) request.

"Holding life insurance in certain types of trusts can exempt it from IHT, making it a powerful estate-planning tool," stated Duncan Mitchell-Innes, a partner and deputy head of private client at TWM Solicitors. Additionally, income and capital gains taxes do not apply to life insurance payouts.

Creating a trust-based life insurance plan.

The majority of people are unaware that life insurance becomes part of the estate if it is not written into trust, which could result in delays through probate and a 40% inheritance tax.

Instead of going to your legal estate, the proceeds of a life insurance policy written in trust can be paid directly to your designated beneficiaries. This indicates that the payout has no IHT due.

According to Mitchell-Innes, "properly structured life insurance can be a potent estate-planning tool. The policy's purpose may be defeated if it is not held in trust because it could be subject to IHT taxation and probate.

"Despite the recent modifications to IHT, life insurance is still one of the few practical means by which families can safeguard their assets. To maximize their advantages, these policies must be properly structured.

To make the process simple and ensure that the funds are going to the appropriate person or people, the majority of providers include an online trust section on the application.

Is it wise to purchase life insurance in order to cover an IHT bill?

Financial advisors have informed the BFIA that since the Autumn Budget 2024, there has been a surge in inquiries regarding whole life insurance, also known as inheritance tax insurance, as a means of covering an anticipated increase in inheritance tax bills.

Whole life insurance, sometimes referred to as life assurance, is a kind of life insurance policy that offers coverage for the rest of one's life. If you continue to pay premiums, which can be expensive, it will pay out a lump sum to your beneficiaries upon your death.

The estimated average for London in the 2026 - 2027 tax year would be about 1,000 per month, or 12,000 per year, for a non-smoker to purchase a whole life policy at age 60 to cover the cost of a 300,000 inheritance tax bill, according to CIExpert, a financial adviser specializing in insurance.

One of the few remaining options is life insurance, and we've seen a rise in the number of people asking for advice in this area," Mitchell-Innes stated.

"The options for lowering your family's IHT bill are becoming increasingly limited, aside from giving assets as gifts.

In separate articles, we examine ways to lower your inheritance tax bill and how to avoid inheritance tax through gifting.