Surge in uptake of life insurance to beat new inheritance tax rules

Life insurance sales are increasing as the first of a series of inheritance tax changes announced by the Chancellor of the Exchequer, Rachel Reeves, is implemented. Significant inheritance tax changes announced in the Autumn 2024 Budget begin to take effect in just two weeks' time, and consumers are reacting by tapping into one of the few mechanisms for tackling the hikes.

What are the impending inheritance tax changes?

Pension fund reforms

From April 2027, a deceased person’s remaining pension funds will become liable for inheritance tax (IHT). Pension funds had historically been a tax-efficient vehicle for passing wealth on to your beneficiaries but the change will mean larger inheritance tax bills. According to the retirement specialist  Standard Life, an “additional 10,500 estates will be brought into paying IHT due to the change in 2027/28, with around 38,500 estates facing higher IHT bills than under previous rules”. You can read more about this in the article, "Inheritance tax and unused pension funds and death benefits".

Business and Agricultural Property Tax reforms

From April 6 2026, new inheritance tax rules will mean that business and agricultural asset exemptions will be capped. Qualifying assets in these categories were previously exempt from inheritance tax but will be capped from April 6. The thresholds were introduced as part of inheritance tax reforms by Rachel Reeves in October 2024 and later increased; exemptions now apply to £2.5 million, with assets over this value liable for 20% inheritance tax. Our article, "Inheritance tax threshold raised for farming businesses", covers this in more detail.

Frozen thresholds

With inheritance tax thresholds frozen until 2030 and unchanged since 2008, more households may find that their estates exceed the current limits as the value of their assets grows. Current thresholds allow up to £325,000 as an individual's nil-rate band for inheritance tax, which can be enhanced with the residential nil-rate band of up to £175,000 if you leave your main residence to your direct descendants. You can read more about it in our article, “Inheritance tax explained”.

Life insurance to pay for inheritance tax

Households are increasingly turning to life insurance solutions to fund potential inheritance tax bills, which are set to rise under new rules. Households may use gifting, where possible, to transfer assets to beneficiaries in a bid to avoid IHT, but gifts remain liable for up to 7 years after transfer.

A number of specialist life insurance advisers have pointed to increased life insurance sales driven by families who wish to protect their pensions or assets that, in many cases, would be difficult to sell, in order to raise proceeds to pay the inheritance tax due. Others explain that the lifetime transfer or gifting of assets after the budget announcement on 30 October 2024 remains liable for up to seven years and households may need a temporary life insurance solution to fund inheritance tax during this time.

Whole of life insurance policies can create a guaranteed lump sum payout upon the insured person’s death to fund inheritance tax, as long as they are placed in a type of trust. The money paid remains outside the estate and can help avoid the need to sell assets or have beneficiaries deplete their own resources. Likewise, gift inter vivos policies that provide seven years of life insurance protection while an inheritance tax liability reduces after making a gift can also be arranged into a trust to fund an IHT bill if it arises.

Find out if you can use life insurance to fund your inheritance tax bill

It is likely that many who stand to be affected by the upcoming inheritance tax changes have not yet acted. In fact, a survey by Standard Life revealed that “9 in 10 (89%) UK adults have little or no awareness of the upcoming inheritance tax (IHT) pension changes”. Life insurance solutions could help ease anxieties and protect your beneficiaries from the challenge of funding an inheritance tax bill.

The life insurance market is vast, with many insurers offering life insurance solutions for inheritance tax planning. Finding the right life insurance for your needs will include sourcing the best price for your current age and the amount of cover that you need as well as the fairest assessment of your circumstances. Insurance companies that seem less costly at the quote stage can often raise rates for applicants with certain medical conditions or lifestyle choices but you won’t know until you apply.

It is almost always best to start your search with a life insurance broker who specialises in inheritance tax and can ascertain how much cover you will need based on an assessment of your estate and how this is arranged. Life insurance brokers have access to a range of insurers and can then source the best-priced policies for your needs as well as take into account any health or lifestyle disclosures that may affect the cost of your life insurance.

At Money to the Masses, we have vetted the life insurance services provided by LifeSearch* where the advisers are extremely proficient in sourcing and securing life insurance for our readers. The brokerage is rated “excellent” with 4.8 out of 5 stars through Trustpilot based on over 23,000 customer reviews. As a Money to the Masses reader you will also get up to £100 cashback if you choose to buy the life insurance they recommend, although you’re not obliged to even after receiving a quote.