UK Life Insurance in Trust Unlock IHT Savings
Discover how placing your life insurance policy in trust can dramatically reduce Inheritance Tax liabilities and accelerate payouts to your loved ones, and use our dedicated Policy in Trust Saver calculator to understand your potential savings and make informed decisions for your estate
Putting your life insurance policy 'in trust' might sound like complex legal jargon, but it's one of the simplest and most powerful financial moves you can make. It's a straightforward process that ensures the people you care about receive the full benefit of your policy payout, quickly and without a hefty tax bill.
By not placing your policy in trust, the payout could be considered part of your estate and become liable for Inheritance Tax (IHT) at a staggering 40%. Our Policy in Trust Saver is designed to show you exactly how much this could cost your family and, more importantly, how much you could save.
What is a Life Insurance Policy in Trust?
Think of a trust as a secure box. When you take out a life insurance policy, you can place it inside this box.
- You (the Settlor): You create the trust and put the policy inside.
- The Trustees: You appoint people you trust (like a spouse, adult child, or solicitor) to look after the box.
- The Beneficiaries: These are the people you want to receive the money when you're gone.
When you pass away, the insurance company pays the money directly to the trustees. The trustees then pass it on to your beneficiaries according to your instructions. The crucial part? The money in the box is no longer legally part of your estate.
The Huge Benefit: Sidestepping Inheritance Tax (IHT)
Inheritance Tax is a tax on the estate (the property, money, and possessions) of someone who's passed away. In the UK, everyone has a tax-free allowance, known as the 'Nil-Rate Band'.
| Allowance Type | Amount (2024/25) | What it means |
|---|---|---|
| Nil-Rate Band | £325,000 | The first £325,000 of your estate is tax-free. |
| Residence Nil-Rate Band | up to £175,000 | An additional allowance if you pass your main home to children or grandchildren. |
Any part of your estate valued above these allowances is typically taxed at 40%.
If your life insurance policy is not in trust, the payout amount is added to the value of your estate. This can easily push your estate over the tax-free threshold, meaning 40% of the insurance payout could go to HMRC instead of your family.
By placing the policy in trust, the payout is made directly to the trust and never becomes part of your estate. It completely bypasses the IHT calculation.
How to Use the Policy in Trust Saver Calculator
Our calculator gives you a clear, instant snapshot of the potential IHT savings. It's simple to use and requires just two pieces of information.
Step 1: Enter Your Inputs
- Life Insurance Payout Amount (£): Enter the total sum assured on your life insurance policy. This is the amount that will be paid out upon your death.
- Estimated Value of Your Estate (£): Provide a rough estimate of your estate's value. This includes your property, savings, investments, and valuable possessions, but excludes your life insurance payout.
Step 2: Understand Your Results
The Policy in Trust Saver will instantly show you:
- Potential Inheritance Tax on Payout: This is the amount of tax that could be charged on your life insurance payout if it's not in trust (assuming your estate is already over the Nil-Rate Band).
- Total Payout to Beneficiaries (With vs. Without Trust): A clear comparison showing how much more your loved ones would receive if the policy is in trust.
- Your Total IHT Saving: The bottom-line figure. This is the amount of money you protect for your family simply by using a trust.
Beyond Tax Savings: Other Key Advantages of a Trust
While saving on tax is a massive benefit, trusts offer other brilliant advantages.
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Faster Payouts: Normally, an estate must go through a legal process called 'probate' before any money can be distributed. This can take many months, sometimes even years. A policy in trust bypasses probate entirely. The trustees can access the funds much faster, providing vital financial support to your family when they need it most.
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Greater Control: A trust allows you to specify how the money is managed. This is particularly useful if your beneficiaries are young children. You can instruct your trustees to release funds at certain ages or for specific purposes, like university fees or a house deposit, ensuring the money is used wisely.
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Protection from Creditors: In some circumstances, assets held in trust can be protected from creditors or from being included in divorce settlements involving a beneficiary.
Worked Example: Sarah’s Story
Let's see how this works in practice.
- Sarah has a £400,000 life insurance policy.
- The rest of her estate (house, savings) is worth £500,000.
- Her IHT Nil-Rate Band is £325,000.
Scenario 1: Policy NOT in Trust
- Total Estate Value: £500,000 (assets) + £400,000 (payout) = £900,000
- Taxable Amount: £900,000 - £325,000 = £575,000
- IHT Due: 40% of £575,000 = £230,000
Her beneficiaries would have to wait for probate and then lose £230,000 of the estate to tax.
Scenario 2: Policy IS in Trust
- The £400,000 payout goes straight to the trust, outside the estate.
- Total Estate Value: £500,000
- Taxable Amount: £500,000 - £325,000 = £175,000
- IHT Due: 40% of £175,000 = £70,000
By using a trust, Sarah saves her family an incredible £160,000 in tax (£230,000 - £70,000). Use our Policy in Trust Saver to run your own numbers and see the impact for yourself.
Common Mistakes to Avoid
Putting a policy in trust is simple, but a few common slip-ups can cause problems:
- Doing Nothing: The biggest mistake is simply not using a trust because it seems complicated. It's not, and the benefits are too good to ignore.
- Choosing the Wrong Trustees: Appoint people who are responsible, trustworthy, and likely to outlive you. You should have at least two.
- Using the Wrong Trust Form: Insurers offer different types of trusts (e.g., Absolute, Discretionary). It's important to choose one that reflects your wishes. An expert broker like WeCovr can help guide you.
- Not Reviewing Your Arrangements: Major life events like marriage, divorce, or having more children are a good time to review your trust and beneficiary nominations.
What to Do After You Get Your Result
If the calculator shows you can make a significant IHT saving, here are your next steps:
- Find Your Policy Documents: If you have an existing life insurance policy, find the details.
- Contact Your Insurer (or Broker): Ask them for their 'life insurance trust forms'. Most insurers provide these completely free of charge. If you're looking for a new policy, an adviser at WeCovr can ensure it's set up in trust from day one.
- Complete the Form: Fill in the details of the settlor (you), the trustees, and the beneficiaries.
- Sign and Store: Sign the trust deed (it will need to be witnessed) and store it in a safe place with your will and other important documents. Let your trustees know where it is.
Connecting to Your Overall Financial Protection
Placing your life insurance in trust is a smart way to optimise your financial plan. It sits alongside other crucial forms of protection that look after you and your family's health and wellbeing.
- Life Insurance: This is the foundation. Having a suitable policy is the first step to providing a financial safety net for your loved ones. WeCovr's experts can help you compare policies from across the market to find the right cover at the right price.
- Private Medical Insurance (PMI): While life insurance protects your family after you're gone, PMI protects you while you're here. It provides fast access to diagnosis and treatment for acute conditions that arise after you take out the policy. It is important to note that PMI does not cover pre-existing or chronic conditions like diabetes or asthma.
As a WeCovr customer, we're dedicated to your overall wellbeing. When you purchase a life insurance or PMI policy through us, you get complimentary access to CalorieHero, our exclusive AI-powered calorie tracking app, to help you stay on top of your health goals. Furthermore, you may be eligible for discounts on other types of cover you need.
Frequently Asked Questions (FAQ)
Is it expensive to put a life insurance policy in trust?
Can I put an existing life insurance policy in trust?
Who should I choose as trustees?
Protect Your Legacy Today
A life insurance policy is a promise to protect your family's future. Placing it in trust ensures that promise is delivered in full, without unnecessary delays or tax deductions.
Don't let a simple administrative step cost your family tens or even hundreds of thousands of pounds.
Use the Policy in Trust Saver now to see your potential savings. Then, speak to the friendly experts at WeCovr to get your life insurance sorted and secured in a trust today.
