Gift inter vivos insurance is a life policy on the donor, usually a seven year term policy whose cover falls in steps, set up to pay the inheritance tax that becomes due if the donor dies within seven years of a large gift. The cover is shaped to follow taper relief, and it should be written in trust so the payout goes straight to the person who has to pay the tax rather than swelling the donor’s estate and being taxed itself.

What problem is the policy meant to solve?

A gift from one individual to another is a potentially exempt transfer. If the donor survives seven years it drops out of account; if not, it becomes chargeable. HMRC’s guidance at IHTM14592 explains that the recipient is liable for tax on a failed gift. Under section 199(2) of the Inheritance Tax Act 1984 the donor’s personal representatives can also be liable, but section 204(8) limits that to cases where no recipient is liable or the tax is still unpaid twelve months after the end of the month of death. Section 226(3A) makes the tax due six months after the end of the month in which the donor dies.

So a child who received £500,000 towards a house can face a bill they cannot pay without selling the house. Gift inter vivos cover provides a lump sum at exactly the moment the bill appears. The underlying rules are explained in the seven year rule for lifetime gifts.

Why does the tax on a failed gift fall over time?

GOV.UK explains that gifts made in the three years before death are taxed at 40%, while gifts made three to seven years before death benefit from taper relief: the rate falls to 32% for three to four years, 24% for four to five, 16% for five to six and 8% for six to seven. After seven years no tax is due on the gift.

Two points shape the insurance. Taper relief reduces the tax, not the value of the gift, and it only has an effect where gifts in the seven years before death exceed the nil rate band. The nil rate band is £325,000 for 2026 to 2027 and HMRC’s published thresholds show it at that level until 5 April 2031. A gift within the nil rate band produces no tax on the gift itself, so there is nothing to taper.

How is the cover matched to the tax?

The policy is a form of term assurance: HMRC defines a term policy at IHTM20102 as one that pays out only if the life assured dies before a specified date. Gift inter vivos cover runs for seven years from the date of the gift, with the sum assured set at the initial tax and then stepping down in line with taper.

Illustration only. Margaret, who has made no earlier gifts, gives her son £525,000 in cash. Ignoring her annual exemptions, the gift exceeds the £325,000 nil rate band by £200,000.

Death occurs Rate on the excess Tax on the gift
Within 3 years 40% £80,000
3 to 4 years 32% £64,000
4 to 5 years 24% £48,000
5 to 6 years 16% £32,000
6 to 7 years 8% £16,000
7 years or more 0% Nil

A policy following this pattern pays enough to cover the son’s tax whenever death occurs in the seven years. If later gifts are made, or the nil rate band changes, the figures need checking again.

Does the gift also increase the tax on the estate?

Often, yes, and this part of the risk does not taper. IHTM14512 explains that a failed gift is cumulated with the death estate. In the illustration the £525,000 gift uses up all of Margaret’s nil rate band, so if she dies within seven years her estate gets none of it. If she leaves a chargeable estate, that is up to £130,000 more tax on the estate (£325,000 at 40%), borne by whoever inherits residue, for the whole seven years.

For that reason, advisers often pair the decreasing gift inter vivos element with level term cover for the nil rate band effect. Whether the second layer is needed depends on the size of the estate, who inherits it, and whether reliefs such as the residence nil rate band or the spouse exemption will apply.

Why should the policy be written in trust?

HMRC’s guidance at IHTM20012 says that where the deceased is the life assured and owns the policy, the proceeds form part of their free estate and are taxable on death. A policy taken out to pay inheritance tax would then attract inheritance tax itself, perhaps at 40%, and be tied up until probate.

Written in trust from the start, the policy belongs to the trustees and the payout can go to the recipient of the gift, usually without forming part of the donor’s estate. The trust choices and the possible trust charges are covered in life insurance written in trust.

Who should own the policy and pay the premiums?

There are two common set ups.

  • The donor takes out the policy in trust for the recipient. IHTM20012 notes that taking out a policy for someone else and paying premiums on it are transfers of value. Premiums are usually covered by the £3,000 annual exemption or by normal expenditure out of income under section 21, provided they are regular, paid from income and leave the donor’s usual standard of living intact. Section 21(2) prevents that exemption where an annuity on the donor’s life is linked to the policy. See IHT exempt gifts.
  • The recipient insures the donor’s life. The recipient owns the policy and pays the premiums from their own funds, so nothing is given by the donor. IHTM20085 describes an insurable interest as arising where someone is likely to lose money or incur a liability on the death of the life assured, which fits a recipient facing a potential tax bill.

What mistakes come up most often?

  • Leaving the policy outside trust, so the proceeds are added to the donor’s estate.
  • Insuring only the decreasing tax on the gift and overlooking the extra tax on the estate from losing the nil rate band.
  • Taking cover when the gift is within the nil rate band, where there is no tax on the gift to taper.
  • Not reviewing cover after further gifts, which change the cumulation.
  • Forgetting that the policy only funds the tax. If the asset has fallen in value by the date of death, the recipient should also consider fall in value relief.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.