Life Insurance · UK Guide 2026

Writing life insurance in trust to avoid inheritance tax

Q: Who should I name as trustees and beneficiaries?

Trustees manage the payout, so choose people you trust and ideally appoint more than one. Beneficiaries are those you want to benefit, such as a partner or children. With a discretionary trust you can guide the trustees with a letter of wishes. This is general information, not advice.

Q: Does a policy in trust still pay out if it covers my mortgage?

Yes. Decreasing or level term policies protecting a mortgage can be written in trust like any other. The trustees receive the payout and can use it as intended, including clearing the mortgage, while keeping the money outside your estate.

If your life insurance is not written in trust, the payout usually lands inside your estate — where it can be taxed at 40% inheritance tax above your allowances. Putting the policy in trust keeps the money outside your estate, so it normally reaches your loved ones in full, free of inheritance tax, and without waiting for probate. Here is how it works in the UK for 2026.

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Quick answer

Does putting life insurance in trust avoid inheritance tax?

Yes, in most cases. A life insurance policy written in trust pays out to your chosen beneficiaries outside your estate, so the payout itself is not subject to the 40% inheritance tax (IHT) that can apply to assets above your allowances.
Without a trust, the payout is normally added to your estate. If your total estate is above the threshold, that can mean up to 40% of the excess going to HMRC.
It is usually free. Most UK insurers let you write a policy in trust at no extra cost, either when you apply or by assigning an existing policy later.
It is also faster. Money held in trust can be paid to beneficiaries without waiting for probate, which often takes months.

The difference it makes

Life insurance in trust vs not in trust

	Not in trust	Written in trust
Counts as part of your estate?	Usually yes	No — held outside the estate
Inheritance tax on the payout	Up to 40% above your allowances	Normally none on the payout itself
Goes through probate?	Often yes — can take months	No — paid by the trustees directly
Who decides where it goes?	Your will (or intestacy rules)	The trust, guided by your wishes
Typical cost to set up	—	Usually free with the insurer’s standard trust form
Speed of payout	Slower — awaits probate	Faster — often weeks, not months

Indicative comparison for orientation only. The exact tax position depends on your estate, the trust used and current HMRC rules — this is not a quote or tax advice.

Why it matters

How inheritance tax hits an untrusted payout

Inheritance tax in the UK is charged at 40% on the value of an estate above the tax-free allowances. For 2026 the standard nil-rate band is £325,000 per person, and a residence nil-rate band of up to £175,000 can apply when you leave your main home to children or grandchildren. In the November 2025 Budget the government extended the freeze on these allowances to April 2031, so they will not rise with inflation — meaning more estates are drawn into the net over time.

A life insurance payout that is not in trust normally adds to your estate. If that pushes you over the threshold, the payout can effectively lose up to 40% to tax — money intended to clear a mortgage or support your family instead funding an IHT bill. The residence nil-rate band also tapers away once an estate exceeds £2 million, reduced by £1 for every £2 over. Writing the policy in trust sidesteps this, because the money never legally forms part of your estate in the first place. For the wider picture, see the life insurance hub or our guide to how much cover you need.

Choosing a trust

The main types of life insurance trust

A trust is simply a legal arrangement where trustees (people you appoint) hold the policy for your beneficiaries (the people you want to benefit). Insurers offer a few standard, ready-made trust forms:

Discretionary trust: the most flexible and most common. You name potential beneficiaries and leave the trustees discretion over who gets what and when, guided by a letter of wishes. Useful where circumstances may change.
Bare (absolute) trust: the beneficiaries are fixed from the start and cannot be changed. Simpler, but inflexible if your family situation changes.
Split / survivor’s trust: often used for joint policies, designed so a surviving partner can still benefit while keeping the payout outside the estate for IHT.

Choosing trustees and beneficiaries, and which trust suits you, is a personal decision — many people take legal or financial advice for larger or more complex estates. For comparison of cover types, see term vs whole-of-life.

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Setting it up

How to put a life insurance policy in trust

In practice it is usually straightforward and free. The cleanest moment is when you take out the policy: most insurers include a trust option in the application, so you complete their standard trust form, name your trustees and beneficiaries, and sign. You can also place an existing policy in trust at any time by asking your insurer for their trust deed and completing it — the cover stays the same, but the legal ownership moves into the trust.

A few practical points: appoint trustees you trust and ideally more than one; it is common to include a spouse plus another adult. Keep a signed copy with your important papers and tell your trustees it exists. Remember that putting a policy in trust is generally not reversible in the way changing a will is, so it is worth getting the set-up right. For estates already facing a confirmed IHT bill, a whole-of-life policy written in trust is the classic way to provide the cash to settle it.

Common questions

Life insurance in trust: FAQs

Does life insurance in trust avoid inheritance tax?

In most cases, yes. A policy written in trust pays out to your beneficiaries outside your estate, so the payout is not normally subject to the 40% inheritance tax that can apply to estate assets above the allowances. The cover itself is unchanged; only the legal ownership and tax treatment of the payout differ.

How much inheritance tax could a payout face if it is not in trust?

Inheritance tax is charged at 40% on the value of an estate above the tax-free allowances. For 2026 the nil-rate band is £325,000 per person, with up to a further £175,000 residence nil-rate band when a main home passes to direct descendants. A payout that pushes the estate over the threshold can lose up to 40% of the excess to tax.

Does it cost anything to put life insurance in trust?

Usually nothing. Most UK insurers provide a standard trust form free of charge, either when you apply or to assign an existing policy later. You may choose to pay a solicitor for a bespoke trust on a larger or more complex estate, but for a straightforward case the insurer’s own trust is typically free.

Can I put an existing life insurance policy in trust?

Yes. You can usually place an existing policy in trust at any time by asking your insurer for their trust deed and completing it with your trustees and beneficiaries. The cover stays the same; the policy’s legal ownership simply moves into the trust so the future payout sits outside your estate.

Who should I name as trustees and beneficiaries?

Trustees are the people who will manage the payout, so choose people you trust and ideally appoint more than one — many include a spouse plus another responsible adult. Beneficiaries are those you want to benefit, such as a partner or children. With a discretionary trust you can guide the trustees with a letter of wishes. This is general information, not advice on your situation.

Does a policy in trust still pay out if it covers my mortgage?

Yes. Decreasing or level term policies taken to protect a mortgage can be written in trust just like any other. The trustees receive the payout and can use it as you intended, including clearing the mortgage, while keeping the money outside your estate for inheritance tax.

Do I still need a trust if I leave everything to my spouse?

Transfers between UK-domiciled spouses or civil partners are generally exempt from inheritance tax, so a trust may matter less in that case. It still helps with speed of payout and avoiding probate, and it is often more important for unmarried partners or where you want money to pass to children, as those transfers are not automatically exempt.

Are there any downsides to writing life insurance in trust?

The main one is that it is generally not reversible in the way changing a will is, so the set-up needs to reflect your wishes. Very large trusts can in some cases face periodic charges, though for typical protection policies this rarely bites. Getting the trust type and trustees right matters, which is why advice is sensible for larger estates.

Information only — not financial or tax advice. Figures are indicative and general in nature, not a quote, and tax treatment depends on your individual circumstances and current HMRC rules, which can change. My Insurance Expert is not an FCA-authorised intermediary and does not arrange or sell policies. Last updated: 2026-06-27

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