Why life insurance could play an even bigger role in Inheritance Tax planning from April 2027

From April 2027, changes to Inheritance Tax (IHT) mean that, in many cases, unused pension funds and death benefits may form part of an individual’s estate for IHT purposes. While the changes won’t affect everyone, they may mean more families are considering how any future Inheritance Tax liability could be met.

One option that may be considered as part of these conversations is life insurance. While it won’t reduce an IHT bill, it could help provide your loved ones with the funds they need to pay it.

The changes due to take effect from April 2027 mean that some estates may become liable for IHT where they previously were not, or that existing tax liabilities could increase.

As a result, individuals and families are reviewing their estate plans to understand how these changes could affect them and whether additional planning may be appropriate.

You can find further information about IHT on the HMRC Inheritance Tax guidance.

In short, no. Life insurance does not reduce the amount of IHT that may be payable on an estate.

Instead, it can provide a cash payment that beneficiaries may use to help settle an IHT bill. This can be particularly valuable where much of an estate is tied up in property, investments or other assets that cannot easily be accessed or sold quickly.

IHT is generally payable within six months of the end of the month in which a person dies and some of the tax may need to be paid before probate can be granted.

Without readily available funds, beneficiaries could find themselves needing to sell property or investments sooner than they would like, potentially at an unfavourable time.

Life insurance can help provide immediate financial support, giving families greater flexibility while an estate is being administered.

Not necessarily. Whether life insurance is appropriate will depend on a range of factors, including:

For some people, life insurance may form part of an effective estate planning strategy. For others, different planning options may be more appropriate.

The right approach will always depend on your individual circumstances.

You may have heard about writing a life insurance policy in trust.

In simple terms, this means placing the policy into a legal trust so that, when the policy pays out, the proceeds are unlikely to form part of your estate. It may allow funds to be paid more quickly than would otherwise be the case.

Whether this is suitable depends on your personal circumstances, so it’s important to take professional advice before making any decisions.

With the April 2027 changes approaching, now is a sensible time to review your estate planning and consider whether your existing arrangements continue to meet your family’s needs.

Life insurance is just one of several tools that may help as part of a wider estate planning strategy. It isn’t a one-size-fits-all solution, but for some families it can provide valuable financial reassurance at an already difficult time.

The Financial Conduct Authority does not regulate Will writing, tax and trust advice and certain forms of estate planning. Tax treatment depends on individual circumstances and may be subject to change. Life insurance is not suitable for everyone and premiums and policy terms will depend on individual circumstances. Writing a policy in trust can have legal and tax implications, so professional advice should be sought before taking action. Cover will cease if premiums are not maintained

This article is for information purposes only and does not constitute personal financial, legal or tax advice.