Surge in wealthy using insurance to beat inheritance tax hit
Brokers and financial advisers have told The Times that they have seen enquiries about life insurance policies for inheritance tax purposes more than double since the chancellor announced a wave of reforms to the system in October.
Life insurance is expensive but it will pay out a lump sum on death and the policy can be put in trust, so it's outside the estate for inheritance tax (IHT) purposes, and can be set up to automatically pay off any IHT bills.
Edward Durell from the life insurance specialist Cover Direct said: 'We have seen a huge increase in the number of people asking in the last few about using life insurance policies as cost effective way to mitigate IHT, I would say these are up by about 100 per cent.
'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.'
In her first budget in October, the chancellor announced changes to agricultural property relief and business property relief systems so estates or companies would now have to pay 20 per cent inheritance tax on assets above £1 million from April 2026. Previously these businesses had been exempt from any inheritance tax regardless of the size of their estate.
Mike Strutt from Risk Assured, another life insurer, said these changes had resulted in a doubling of the number of enquiries it had seen from customers looking to take out lifetime insurance policies to help soften expensive bills for relatives.
Strutt, whose company specialises in providing policies for inheritance tax purposes, said because the legislation had not been published yet, many of those had not yet signed up to these policies.
'Most people won't put that cover in place yet but we are encouraging people to get their ducks in a row so they are ready to roll when they do. We expect there to be a big wave of people taking out policies when the IHT changes come in,' he said.
The increase in inquiries is largely driven by those looking to take out whole life policies, or life assurance, which sees people pay a monthly premium that will pay out a lump sum on death, regardless of what age you die at.
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The insurance broker LifeSearch said that sales of whole life cover had increased 230 per cent since last autumn, while other companies have reported similar increases in those taking up
Chris Etherington from tax specialist RSM said that life insurance policies were particular for businesses and farms who would have most of their estate tied up in illiquid assets like property or farms, which can take some time to sell after death.
'A lot of people are thinking, as long as the premiums aren't too excessive, they should probably take out a life insurance policy to meet these inheritance tax bills,' he said.
He added that many people that were not business owners and farmers were also now looking to see if they could be used to help cover any liabilities those inheriting their estate may incur from unused pension pots.
As part of her IHT reforms, Reeves also announced that from April 2027 unused defined contribution pension pots would also become subject to inheritance tax.
'More and more people are looking at their pension pots and wondering whether to withdraw, but then decide to take out life insurance to cover the potential bill,' Etherington said.
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There are three types of insurance that can cover inheritance tax liability: whole of life policies; 'gift inter vivos' policies, covering specific gifts rather than someone's entire estate; and term insurance covering set periods, often ten or 20 years, or until the age of 90.
Sean McCann from insurer NFU Mutual said they had more business owners looking at gift inter vivos policies to protect gifts to loved ones from tax bills.
These policies last for seven years after you give an asset to someone (after which it would fall out of your estate for IHT purposes anyway), and will payout to cover the bill if you die before the end of the policy term.
McCann said: 'We are seeing more people giving away assets and they'll often take these seven-year policies, including one owner of a £5-million business who wanted to hand over shares in it to his children.'
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