Inheritance Tax Surge Fuels Life Insurance Boom
Recent changes to UK inheritance tax (IHT) rules are driving a significant increase in the number of people taking out life insurance, particularly whole-of-life policies. Insurers and wealth managers report substantial rises in applications, as individuals seek to mitigate potential tax liabilities.
Pensions and the IHT Net
The catalyst for this trend was Chancellor Rachel Reeves’ announcement in the 2024 Budget that pensions would fall within the scope of IHT from 2027. This effectively transforms pensions from a tax-efficient way to pass on wealth to one of the least efficient. Previously, unused pension funds were largely exempt from IHT.
Dramatic Increase in Policy Sales
The impact has been immediate. Evelyn Partners saw a 66 per cent increase in whole-of-life cases processed in 2025 compared to the previous year. Royal London reported a 50 per cent jump in sales of these policies over the same period. Legal & General experienced a 500 per cent increase in the value of sales for whole-of-life products in the first quarter of 2024 and the final quarter of 2023.
Why Whole-of-Life Insurance?
Whole-of-life policies pay out a guaranteed sum upon death and, crucially, when held in a trust, they are not considered part of the estate for IHT purposes, avoiding the standard 40 per cent tax rate. Barry O’Dwyer, chief executive of Royal London, stated that purchasing life insurance is “by far” the easiest way to plan for IHT.
Beyond Pensions: Relief Reforms and Business Assets
The 2024 Budget also included reforms to agricultural property relief and business property relief. These changes mean that individuals with large estates or companies previously exempt may now face a 20 per cent IHT rate on assets above £2.5 million from April. This has further fueled demand for life insurance, particularly to cover hard-to-sell assets like family businesses, and farms.
The Challenge of Liquidity
Owners of these assets often want to maintain family ownership, but finding the cash to pay the IHT bill can be demanding when the asset itself cannot be quickly sold. Whole-of-life insurance provides a solution by offering a lump sum to cover the liability.
Rising Sums Assured
The scale of the policies being taken out is also increasing. Evelyn Partners is currently assisting clients with potential IHT liabilities exceeding £10 million. SPF, part of insurer Howden, has seen increased popularity in term life insurance solutions to protect lifetime transfers.
The Seven-Year Rule Remains
It’s important to remember that gifts made in life may still be subject to IHT if the individual dies within seven years of making the gift.
Future Trends & Considerations
Increased Complexity in IHT Planning
The changes to IHT rules are making estate planning more complex. Individuals will need to seek professional advice to navigate the fresh landscape and ensure their estates are structured efficiently.
Growth in Specialist Insurance Products
We can expect to see further innovation in life insurance products designed specifically for IHT planning. This may include policies with more flexible features or those tailored to specific asset types.
Pressure on the Government to Reconsider
Peers in the House of Lords have already raised concerns about the six-month timeframe for paying IHT on unused pensions, calling for an extension to one year. Continued pressure from industry stakeholders and individuals could lead to further adjustments to the rules.
FAQ
Q: What is whole-of-life insurance?
A: A type of life assurance that pays out a guaranteed sum of money to beneficiaries upon death.
Q: How does it help with IHT?
A: When held in trust, it’s not part of your estate and isn’t subject to IHT.
Q: What is the nil-rate band?
A: The amount of your estate that can be passed on tax-free, currently £325,000, potentially rising to £500,000 with a property allowance.
Q: What are the changes to business and agricultural relief?
A: Assets above £2.5 million may now be subject to a 20% IHT rate.
Did you know? The government forecasts that the changes to IHT will raise £1.5bn a year for the Treasury by 2030.
Pro Tip: Seek professional financial advice to understand how the IHT changes affect your specific circumstances.
Interested in learning more about estate planning? Explore more articles on the Financial Times website.
