The short answer
If your life insurance is not in a trust, your family could lose up to 40% of the payout to inheritance tax and wait months to access the rest. Setting up a trust is free with most insurers. Our partner brokers do it on the call.
Why your life insurance needs to be in trust
When you die, everything you own becomes your “estate.” Your house, your savings, your investments, your car - and, critically, any life insurance policies that are not in trust.
If your life insurance payout goes into your estate, two things happen - and neither of them is good.
Problem 1: Inheritance tax
The life insurance payout is added to the value of everything else you own. If the total exceeds the inheritance tax threshold, your family pays 40% tax on the excess. A £500,000 life insurance payout intended to clear the mortgage could result in a £200,000 tax bill. The policy that was supposed to protect your family ends up funding HMRC.
Problem 2: Probate delays
Before anyone can access money held in an estate, a legal process called probate must be completed. This typically takes 6 to 12 months. During this time, your family cannot access the life insurance payout. The mortgage, the bills, the school fees, the funeral costs - none of these wait for probate to finish.
The honest answer
A trust solves both problems entirely. The life insurance payout goes directly to your beneficiaries, outside of your estate. No inheritance tax. No probate. The money is typically available within days, not months. And setting it up costs nothing with most insurers.
Your trust gets set up on the call
It takes about 2 minutes, it is completely free, and it could save your family tens of thousands of pounds. There is genuinely no reason not to do it.
Get QuoteInheritance tax explained
Inheritance tax (IHT) is charged at 40% on the value of your estate above the tax-free threshold. It is one of the most misunderstood taxes in the UK, and it catches far more families than most people realise.
The current thresholds
| Allowance | Amount | Notes |
|---|---|---|
| Nil-rate band | £325,000 | Everyone gets this. Frozen since 2009. |
| Residence nil-rate band | £175,000 | Only applies if you leave your home to direct descendants. |
| Combined individual | £500,000 | Maximum per person if conditions are met. |
| Married couple (transferable) | £1,000,000 | Unused allowance transfers to surviving spouse. |
The fiscal drag problem
The nil-rate band has been frozen at £325,000 since 2009. In that time, average UK house prices have risen by over 60%. The threshold has not moved a penny. This means families who would never have considered themselves wealthy enough to worry about inheritance tax are now being caught by it - simply because their property has increased in value.
HMRC collected £7.5 billion in inheritance tax in the 2023/24 tax year. That figure has been rising steadily, and the frozen thresholds guarantee it will continue to do so.
A worked example
Example: Married couple, home left to children
In this scenario, the estate falls within the combined allowances - no IHT is due. But what if the estate is slightly larger?
If that £350,000 life insurance policy had been in trust, it would not form part of the estate. The estate would total £700,000 - well within the combined allowances. No IHT. No delay. The entire payout reaches the family intact.
The honest answer
The numbers do not need to be enormous for IHT to apply. A modest family home in the South East, a life insurance policy, and some savings can push you over the threshold. The nil-rate band has not changed since 2009 and there is no indication it will any time soon. Putting your policy in trust is the simplest, most effective thing you can do about it.
Probate explained
Probate is the legal process of administering a deceased person's estate. Before any money, property, or assets can be distributed to beneficiaries, someone - usually the executor named in the will - must apply for a grant of probate from the Probate Registry.
How long it takes
The government's own guidance suggests 6 to 12 months as typical. In practice, complex estates can take significantly longer. During this time, bank accounts are frozen, property cannot be sold, and life insurance payouts held within the estate cannot be accessed.
What your family faces during probate
Mortgage payments
The mortgage does not pause because someone has died. If your family cannot meet the payments, the lender can begin repossession proceedings.
Household bills
Council tax, utilities, insurance on the property - these all continue. If the deceased was the primary earner, the surviving family may have no way to pay them.
Funeral costs
The average UK funeral costs between £4,000 and £6,000. This is an immediate expense, due long before probate completes.
Day-to-day living
If the deceased was the main income provider, the family needs money now - not in 6 to 12 months. Children still need feeding, clothing, and getting to school.
The honest answer
A life insurance policy in trust bypasses probate entirely. The payout goes directly to the beneficiaries, typically within days. The money is available when it is needed most - immediately. This alone is reason enough to use a trust, even if inheritance tax is not a concern for your estate.
Two minutes on the phone. Trust set up for free.
Our partner brokers handle the trust paperwork on every policy they arrange. No solicitor needed. No cost. One call and it is sorted.
Get QuoteTrust types for life insurance
Not all trusts are the same. The right type depends on your policy, your family situation, and what you are trying to achieve. Here are the four main types used for life insurance in the UK.
Flexible / Discretionary Trust
Most commonThe most widely used trust for life insurance policies, and the one we recommend in most situations.
You name potential beneficiaries - typically your spouse, children, and possibly grandchildren - but the trustees decide how the money is distributed when the time comes.
This flexibility is the entire point. If your circumstances change - a new child, a divorce, a beneficiary with debt problems or going through their own divorce - the trustees can adapt without needing to change the trust itself.
Most insurers provide their own discretionary trust form. It costs nothing to set up and takes about two minutes on the phone.
Best for: Most families. Married couples, parents with young children, anyone who wants flexibility.
Absolute / Bare Trust
SimplestA simpler, more rigid trust where the beneficiaries are fixed from the start.
You name specific beneficiaries and specific shares. Once set up, it cannot be changed. If you name your two children as 50/50 beneficiaries, that is locked in.
The simplicity can be an advantage in certain situations - there is less room for dispute, and the tax treatment is straightforward. But for most people, the inflexibility is a significant drawback.
If a named beneficiary dies before you, their share typically passes to their estate rather than being redistributable. That alone makes it less suitable for most families.
Best for: Single people with one clear beneficiary. Situations where you are certain the beneficiary will never need to change.
Split Trust
Combined policiesDesigned specifically for policies that combine life insurance with critical illness cover.
A combined life and critical illness policy has two potential payouts: the life cover (paid on death) and the critical illness cover (paid on diagnosis of a qualifying condition).
With a split trust, the life insurance element goes into trust for your beneficiaries, but the critical illness benefit is paid directly to you. This makes sense because the critical illness payout is intended to help you while you are alive - to cover treatment costs, adapt your home, or replace lost income.
Without a split trust, a critical illness claim could become complicated if the entire policy is in a standard trust.
Best for: Anyone with a combined life and critical illness policy. If you have separate policies, you do not need this.
Business Trust
Business policiesUsed for business protection policies including relevant life, key person, and shareholder protection.
Business trusts work differently from personal trusts because the policy is typically owned by the business rather than an individual.
For relevant life policies, a trust ensures the death benefit reaches the employee's family rather than the company. For shareholder protection, a trust ensures the surviving shareholders can purchase the deceased shareholder's shares from their estate.
Business trusts need to be set up correctly to maintain the tax advantages that make these policies worthwhile. The structure varies depending on the type of business protection.
Best for: Company directors, business partners, employers providing death-in-service benefits through relevant life policies.
Not sure which trust type you need?
We will recommend the right type based on your policy and circumstances. It is part of our standard service - no extra charge.
Get QuoteThe 7-year rule and gift inter vivos
The 7-year rule is one of the most commonly referenced - and commonly misunderstood - aspects of inheritance tax planning. Here is how it actually works.
The basic principle
If you make a gift during your lifetime and survive for at least 7 years after making it, that gift is completely exempt from inheritance tax. It falls outside your estate as if it was never yours.
If you die within 7 years of making the gift, it is treated as a “potentially exempt transfer” (PET) and may be subject to inheritance tax. However, the tax rate reduces the longer you survive - this is called taper relief.
Taper relief rates
| Years between gift and death | IHT rate applied | Effective reduction |
|---|---|---|
| 0 to 3 years | 40% | None |
| 3 to 4 years | 32% | 20% reduction |
| 4 to 5 years | 24% | 40% reduction |
| 5 to 6 years | 16% | 60% reduction |
| 6 to 7 years | 8% | 80% reduction |
| Over 7 years | 0% | Fully exempt |
Gift inter vivos policies
A gift inter vivos policy is a specific type of life insurance designed to cover the potential IHT liability on a large gift during the 7-year window. The cover decreases over the 7 years in line with taper relief, so the premium reflects the diminishing risk.
These policies are particularly useful if you are gifting a significant sum - for example, helping a child buy a house - and want to ensure that if you die within 7 years, the inheritance tax bill does not fall on the recipient. The policy pays out enough to cover the tax, and the cover reduces as the taper relief kicks in.
The honest answer
Taper relief only applies where the gift exceeds the nil-rate band. If your total gifts in the 7 years before death are within the £325,000 nil-rate band, there is no IHT on them regardless. Taper relief reduces the rate of tax on the excess, not the amount of the gift.
How your trust gets set up
Our partner brokers include trust setup as a standard part of every policy they arrange. It is not an add-on, not an upsell, and not something they charge for. Here is exactly what happens.
We assess your situation
During your call, we ask about your family circumstances, your policy type, and what you are trying to achieve. Based on this, we recommend the appropriate trust type - usually a flexible discretionary trust, but sometimes a split trust or absolute trust depending on the situation.
We complete the trust form
Most insurers provide their own trust deed as part of the application. We complete the trust details during the call - your chosen beneficiaries, your nominated trustees, and any specific wishes. The whole process typically takes about 2 minutes.
It is submitted with your application
The trust is set up at the same time as your policy. There is no separate process, no separate form to post, and no solicitor involvement required. When your policy goes live, it is already in trust from day one.
We explain the letter of wishes
A letter of wishes is an informal document that tells your trustees how you would like the trust fund to be distributed. It is not legally binding, but trustees typically follow it. We explain what to include and how to keep it updated.
There is no cost. There is no catch.
Insurers provide the trust forms for free. We complete them as part of our standard service. Every policy our partner brokers arrange includes trust setup. The only reason not to do it is if your specific situation genuinely does not require one - and we will tell you honestly if that is the case.
Get QuoteFree. No obligation. Trust set up as part of the process.
Common trust mistakes to avoid
We see these regularly. Most are easily avoided with the right advice at the right time.
Not putting the policy in trust at all
The payout goes into your estate. Your family faces a potential 40% IHT bill and months of probate delays. This is the most common mistake and the most easily avoided - it is free to fix.
Using the wrong type of trust
A combined life and critical illness policy in a standard discretionary trust could mean the critical illness benefit is paid to your beneficiaries rather than to you. A split trust solves this, but it needs to be set up at the outset.
Naming the wrong trustees
Trustees control the money. If you name only your spouse and they are the primary beneficiary, there can be conflicts of interest. Most advisers recommend naming at least two trustees, with at least one who is not a beneficiary.
Not reviewing trusts after major life changes
Divorce, remarriage, new children, estrangement, death of a beneficiary - all of these can make your existing trust arrangement unsuitable. With a discretionary trust, the structure itself does not need to change, but your letter of wishes should be updated.
Assuming existing policies are already in trust
They almost certainly are not, unless someone specifically set one up. Policies arranged through a mortgage lender, bought online, or set up years ago very rarely include a trust. It is worth checking every policy you hold.
Thinking trusts cost money or require a solicitor
Most insurers provide their own trust forms at no charge. We complete them during the phone call. No solicitor is needed for a standard life insurance trust. It takes about two minutes.
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