Trusts, tax and business
Life insurance in trust: the tax a payout adds to the estate
A life policy paid to the estate is counted with everything else for inheritance tax. Enter the estate, the payout and the home to compare.
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Inheritance tax on a payout outside a trust
Example, not your result yet· change a figure to see yours
Extra inheritance tax if paid to the estate
£60,000
| Family keeps, policy in trust | £250,000 |
| Family keeps, paid to the estate | £190,000 |
| Threshold used | £500,000 |
Tax at 40% above the threshold. A spouse or civil partner inherits free of inheritance tax.
A life insurance payout that is not written in trust is paid to the estate of the person who died and counts towards its value for inheritance tax, as GOV.UK’s guide to valuing an estate lists. Inheritance tax is charged at 40% on the value above the nil-rate band of £325,000, plus a residence nil-rate band of up to £175,000 when a home goes to children or grandchildren, which is tapered away on estates above £2,000,000. Take an estate of £400,000, including a home of £300,000 left to the children, and a policy paying £250,000. Paid to the estate, the policy adds £60,000 of inheritance tax, so the family keeps £190,000 of it. Written in trust, the payout goes to the trustees outside the estate, is not counted, and is usually available without waiting for probate. Anything left to a spouse or civil partner is free of inheritance tax, so the question matters most for unmarried couples and for the second death.
Rates read and sums checked by Radif Partners · Editorial policy · How the figures are worked out
Tax added by different payouts
The estate is £400,000 without the policy, including a home of £300,000 left to the children, and no spouse inherits. The second column is the tax on the estate alone, which is what the family pays with the policy in trust; the third is the tax with the payout added.
| Payout | Tax, policy in trust | Tax, paid to the estate | Extra tax | Family keeps of the payout |
|---|---|---|---|---|
| £100,000 | £0 | £0 | £0 | £100,000 |
| £200,000 | £0 | £40,000 | £40,000 | £160,000 |
| £300,000 | £0 | £80,000 | £80,000 | £220,000 |
| £500,000 | £0 | £160,000 | £160,000 | £340,000 |
When the payout pushes the estate past the taper
The residence nil-rate band falls by one pound for every 2 pounds of estate above £2,000,000. A large payout can push an estate over that line and cost part of the band as well as the tax on the payout itself.
| Estate without the policy | Threshold with the payout added | Extra tax on a payout of £250,000 |
|---|---|---|
| £200,000 | £500,000 | £0 |
| £400,000 | £500,000 | £60,000 |
| £700,000 | £500,000 | £100,000 |
| £1,500,000 | £500,000 | £100,000 |
| £2,200,000 | £325,000 | £130,000 |
What a trust changes, and what it does not
A trust changes who owns the payout: the trustees claim it and pay it to the beneficiaries, so it is not part of the estate and not covered by the will. It does not change the policy’s price or the chance of a claim. The type of trust decides how flexible it is: in some, the beneficiaries are fixed; in a discretionary trust the trustees choose among a list. GOV.UK’s page on trusts and taxes describes the types, and its guide to trusts and inheritance tax explains the charges on relevant property.
Where it matters most
For a married couple leaving everything to each other, the first death has no inheritance tax, so a payout to the estate is not taxed then; but it may raise the estate at the second death. For an unmarried couple, there is no spouse exemption at all, which is why the unmarried couples page treats a trust as the first step. GOV.UK’s estate valuation guide lists life insurance payouts among the assets to count. A whole of life policy in trust is a common way to provide the money to pay the bill.
Choosing trustees
Trustees are the people who claim the money from the insurer and pay it out. Many people name their partner and one or two others, such as an adult child or a close friend, so that the trust can still act if one trustee has died or cannot be reached. The person insured is often a trustee too, so that they can manage the trust while alive. Naming trustees who will be easy to contact and willing to act matters more than their legal knowledge.