Life insurance written in trust and IHT

Q: What does this look like for a typical family policy?

Illustration only. Priya, aged 40, takes out a 25 year term policy with a sum assured of £400,000 and writes it into a discretionary trust for her partner and children at the outset. She pays £40 a month from her salary. Each premium is a transfer into a relevant property trust, but it is exempt as normal expenditure out of income because it is regular, paid from salary and leaves her standard of living intact. At the tenth anniversary Priya is healthy, the policy has no surrender value and the trust holds nothing else, so there is no ten year charge. Priya dies in year 12. The £400,000 is paid to the trustees and is not part of her estate. When the trustees later distribute it, section 69 bases the exit rate on the rate charged at the tenth anniversary, which was nil, so no exit charge arises. Had the policy been in Priya's own name, the £400,000 would have been added to her estate and, above her available nil rate bands, taxed at 40%.

A life policy written in trust from the outset belongs to the trustees, not to the person whose life is insured, so the payout on death is not part of that person’s estate for inheritance tax. The cost of setting it up and each premium are gifts to the trust, which are usually covered by exemptions, and if the trust is a discretionary or other relevant property trust it can face ten year and exit charges like any other trust.

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Why does a policy in trust usually fall outside the estate?

A life policy is an item of property that can be assigned or placed in trust (IHTM20141). HMRC’s Inheritance Tax Manual at IHTM20012 explains the starting point: if the deceased was the life assured and owned the policy, the proceeds form part of their free estate and are taxable on death. If the policy is held by trustees for other people, the deceased did not own it, so the proceeds go to the trustees and are not added to the death estate.

Is setting up the trust itself a gift?

Yes. IHTM20251 states that where a policy is effected for the benefit of someone else from the start, effecting the policy is a transfer of value, normally measured by the first premium, and each later premium the person pays is a further transfer. IHTM20012 adds that premiums may be potentially exempt transfers or chargeable transfers, taking account of any exemption such as normal expenditure out of income.

In practice most premiums are exempt:

Normal expenditure out of income. Section 21 of the Inheritance Tax Act 1984 (IHTA 1984) exempts a transfer that is part of the transferor’s normal expenditure, made out of income taking one year with another, and leaves them with enough income to maintain their usual standard of living. Regular monthly premiums paid from salary or pension often fit. Section 21(2) removes this exemption where an annuity was bought on the same life and the two are associated operations, which is aimed at back to back schemes.
The annual exemption. Section 19 exempts £3,000 of transfers in each tax year, with any unused part carried forward one year.

If neither exemption applies, the premium is a lifetime transfer. Into a relevant property trust it is an immediately chargeable transfer, but the tax only bites once the person’s cumulative chargeable transfers in seven years exceed the nil rate band, which HMRC’s threshold table shows as £325,000 from 6 April 2009 to 5 April 2031. HMRC’s trusts guidance gives the lifetime rate as 20% where the trustees pay.

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Which type of trust is being used?

The trust wording decides the inheritance tax treatment, and IHTM20141 tells HMRC officers to read the documents to find the beneficial interests. Broadly:

Bare (absolute) trusts. GOV.UK explains that transfers into a bare trust may be exempt if the person survives seven years, the same as a gift to an individual. The beneficiaries are fixed and cannot later be changed.
Discretionary and most other lifetime trusts made after 22 March 2006. These hold relevant property. HMRC’s guidance lists the exceptions, such as interest in possession trusts set up before 22 March 2006 and trusts for disabled people. So a discretionary life policy trust set up today is a relevant property trust.
Older policies. IHTM20202 explains that policies written into trust before 22 March 2006 keep their earlier treatment under sections 46A and 46B, and that paying further premiums under the existing contract does not create a new relevant property settlement, although a variation that amounts to a new contract can.
Married Women’s Property Act policies. IHTM20181 explains these create trusts only for the spouse or civil partner and children of the life assured.

What trust charges can still apply?

A relevant property trust can face two charges, set out in HMRC’s guidance on trusts and inheritance tax:

The ten year anniversary charge, on the net value of relevant property on the day before each anniversary. Section 66 sets the rate at three tenths of the effective lifetime rate, and with a lifetime rate of 20% that means at most 6%.
Exit charges, also up to a maximum of 6%, when property leaves the trust, for example when the trustees pay the proceeds out to beneficiaries. There is no exit charge on a distribution within three months of the trust starting or of a ten year anniversary.

For most protection policies these charges are nil or small, for two reasons. While the life assured is alive, a term policy has no surrender value (IHTM20083), so the value in the trust at a ten year anniversary is usually low. HMRC values policies on an open market basis under section 160, and IHTM20083 notes that a term policy may still have a market value, which needs care if the life assured is seriously ill at the anniversary. Second, for an exit before the first ten year anniversary, section 68 of IHTA 1984 sets the rate by reference to the value of the property when the settlement began and the settlor’s chargeable transfers in the seven years before that, not the size of the payout. Where the policy was settled on a small first premium and the settlor had little prior cumulation, the rate is usually nil.

Charges become more likely where proceeds are paid out after the first ten year anniversary, or where the trustees keep a large payout invested in the trust for many years.

Can the person insured be a beneficiary?

Only with care. HMRC’s trusts guidance explains that if you make a gift into a trust but continue to benefit from it, it is a gift with reservation of benefit and still counts as part of your estate, and there can be both an entry charge and a charge on death, with only the higher applied. If the policy also pays a living benefit, such as a critical illness payment, look at whether the trust wording lets the life assured take anything from the trust fund. HMRC officers are told to read the policy and trust documents to establish the beneficial interests (IHTM20141).

Does the trust need to be registered?

Often not while the life assured is alive. HMRC’s Trust Registration Service Manual at TRSM23030 confirms that a trust holding a life policy is excluded from registration if the policy pays out only on death, terminal or critical illness, or disablement of the person assured, or to meet healthcare costs. After a death, the exclusion continues for two years from the date of death for the payout. If the trustees still hold the money after two years, the trust must then register. A trust that holds an investment bond with planned withdrawals is not covered by the exclusion. For how those bonds are taxed see chargeable event gains on investment bonds.

What does this look like for a typical family policy?

Illustration only. Priya, aged 40, takes out a 25 year term policy with a sum assured of £400,000 and writes it into a discretionary trust for her partner and children at the outset. She pays £40 a month from her salary.

Each premium is a transfer into a relevant property trust, but it is exempt as normal expenditure out of income because it is regular, paid from salary and leaves her standard of living intact.
At the tenth anniversary Priya is healthy, the policy has no surrender value and the trust holds nothing else, so there is no ten year charge.
Priya dies in year 12. The £400,000 is paid to the trustees and is not part of her estate. When the trustees later distribute it, section 69 bases the exit rate on the rate charged at the tenth anniversary, which was nil, so no exit charge arises.

Had the policy been in Priya’s own name, the £400,000 would have been added to her estate and, above her available nil rate bands, taxed at 40%.

What goes wrong in practice?

Not writing the policy in trust at the start. Transferring an existing policy later is a gift of its value at the date of transfer (IHTM20012).
Premiums paid from capital rather than income, so the normal expenditure exemption fails and the gifts must be tracked.
Leaving trustees unappointed or out of date, so there is nobody able to claim.
Trustees holding a payout for years without considering registration, ten year charges or the trust’s income tax position.
Joint life policies where the trust wording does not match who paid the premiums (IHTM20302).

Where a payout or a policy in an estate interacts with other reliefs, see our pages on the residence nil rate band, deeds of variation and acting as executor or trustee.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.