Funding Inheritance Tax With Life Insurance: Where Things Stand After the Budget

For solicitors, IFAs, accountants, wealth managers and other professional advisers.

At a glance

The 28 October Budget made no changes to IHT thresholds, reliefs or gifting rules. The April 2027 pension change goes ahead, with new rules on how the tax on pensions is paid.

From 6 April 2027, most unused pensions fall into the estate for IHT, and can push estates past the £2m residence nil rate band taper.

Thresholds are frozen until April 2031, and business and agricultural relief is now capped at £2.5m per person at the full rate.

In our example below, the IHT bill on second death rises from £400,000 to £860,000 once pensions count.

Life cover written in trust can fund that liability. You lead the planning; we arrange the cover at no fee to your client.

Have a client in mind already? Request an IHT protection review and we will come back to you within one working day.

The Budget and your clients

Your clients will be asking what the Budget means for their Inheritance Tax (IHT). The Autumn Budget on 28 October 2026, the first from Chancellor John Healey, made no changes to IHT thresholds, reliefs or the rules on lifetime gifts.

The rules already in law therefore set the timetable. Most unused pensions come into the estate from 6 April 2027, around five months away, and thresholds stay frozen until April 2031.

The Budget did make two technical changes. New rules from 6 April 2027 change how the IHT on pensions can be paid, which we cover below. From 28 October 2026, a second measure prevents certain liabilities in trust arrangements from reducing IHT where they are funded with value from a beneficiary’s own estate.

Whole of life cover typically takes six to twelve weeks to put in place, so now is the time to identify which clients are affected. When your planning identifies a liability, life insurance written in trust is often the simplest way to fund it. We arrange the cover, while you lead the planning with your client.

Pensions from April 2027

From 6 April 2027, most unused pension funds and death benefits will form part of the estate for IHT. The change is now law under the Finance Act 2026, which received Royal Assent on 18 March 2026. Death in service benefits from a registered pension scheme will be excluded from these changes.

Pensions have long been a first choice for passing on wealth free of IHT, so many existing plans will need revisiting. Personal representatives will also be responsible for reporting and paying any tax due on pension funds.

Pensions passing to a surviving spouse or civil partner will generally remain exempt, so for many couples the liability crystallises on the second death. That is where the funding need usually sits.

Adding a pension can take an estate over £2m, where the residence nil rate band starts to taper away. For some clients, that means a larger liability on the rest of the estate as well as on the pension itself.

Where death occurs at 75 or over, beneficiaries may also pay income tax at their marginal rate on what they draw from an inherited pension, after IHT has been paid. The legislation prevents the same value being taxed twice in full, but the combined effect is still significant. Where pension funds bear IHT at 40% and the remaining funds are withdrawn at a 45% income tax rate, the combined effective tax rate is 67%.

Frozen thresholds

The nil rate band (£325,000), the residence nil rate band (£175,000) and the £2m taper threshold are frozen until April 2031. The nil rate band has not risen since 2009.

As property and investment values rise, more estates come into IHT each year. Above £2m, the residence nil rate band reduces by £1 for every £2 over the threshold, so a married couple’s combined £350,000 residence nil rate band is lost entirely once the estate reaches £2.7m.

A simple example

On the second death, the surviving spouse’s estate includes a home and investments worth £2m, plus £800,000 in pensions. The home is worth at least £350,000 and passes to their children, full transferable allowances are available before any taper, asset values are unchanged, no lifetime gifts or other reliefs apply, and the pension benefits are outside IHT under the rules before 6 April 2027 and within scope from that date.

IHT calculation on second death	Before 6 April 2027	From 6 April 2027
Value included for IHT purposes	£2,000,000	£2,800,000
Combined nil rate bands	£650,000	£650,000
Combined residence nil rate bands after taper	£350,000	£0
Taxable amount	£1,000,000	£2,150,000
IHT at 40%	£400,000	£860,000

If clients in a similar position come to mind, this is where we fit: your planning sizes the liability, and we arrange the cover to fund it.

Business and agricultural relief

Since 6 April 2026, a combined £2.5m allowance per person applies to property qualifying for 100% business or agricultural relief. Qualifying property above that receives 50% relief, an effective IHT rate of 20% before any other allowances or exemptions. Unused allowance can transfer to a surviving spouse or civil partner, so a couple may have up to £5m relieved at the full rate. Qualifying shares traded on AIM now receive 50% business relief rather than 100%.

IHT on property that qualifies for these reliefs can be paid in 10 equal annual instalments, interest free. That spreads the cost, but the liability remains, often where the assets themselves are not easy to sell. Protection in trust can provide funds on death, reducing the need for a forced sale of business or agricultural assets.

For owner-managed businesses, this sits naturally alongside shareholder protection and key person cover, which keep the business stable while the family meets the tax. We can review all three together.

Which clients should you review?

These are the situations where we most often see a funding gap. Each is a prompt to revisit the client’s projected liability and whether protection has a role.

Client circumstance	What to check
Substantial unused pension, estate near or above £2m	Recalculate the projected liability from April 2027, including the residence nil rate band taper
Business or agricultural assets above the £2.5m allowance	Whether the family could meet the tax, even in instalments, without selling the business or land
Large lifetime gifts made or planned	Whether the seven year exposure falls on the gift or the retained estate, and whether it is covered
Planning to move abroad	The IHT tail period, and arranging cover while still UK resident
Existing life cover not in trust, or old trusts	Whether proceeds would add to the estate, and whether beneficiaries and cover levels still fit
Reviewable whole of life policies	Whether the premiums will remain affordable as the client ages

How protection fits

Taken together, the changes above mean more clients face an IHT liability on death. Life insurance funds that liability rather than removing it, providing a source of money alongside the estate planning. Our inheritance tax planning with life insurance page explains the available approaches. When a policy is written in an appropriate trust, the proceeds can normally be paid to the trustees outside the estate. The trust arrangements then determine how those funds are made available to meet the liability. In practice, trustees usually do this by lending to the executors or buying assets from the estate, rather than paying the tax directly, so the trust needs to allow for this.

For couples, where the need arises on the second death, a joint life second death whole of life policy, written in an appropriate trust, is designed to provide a lump sum when it is needed. For single clients, a single life whole of life policy works on the same basis.

IHT is generally payable by the end of the sixth month after the month of death, and a payment is usually required before probate can be granted. The policy is designed to provide funds towards the liability, reducing the need to sell the home, investments or business assets to meet it. Available estate funds and any applicable instalment arrangements should also be considered when assessing the protection need.

The appropriate policy and level of cover depend on the expected liability, how long the funding need will last, the client’s health and the affordability of premiums. Working through those factors, and finding the insurers best placed to accept the risk, is where our expertise makes the most difference. Cover should also be reviewed as asset values, family circumstances and tax rules change.

Premiums paid on a policy held in trust are generally gifts for IHT purposes. They may qualify for the £3,000 annual exemption, to the extent available, or the normal expenditure out of income exemption where its conditions are met. The source and pattern of payments should be documented.

Where guaranteed whole of life is too expensive

Where guaranteed whole of life premiums are unaffordable, other structures may provide some or all of the required cover, with different limits and risks:

Term cover to age 90: can provide the required lump sum at a lower premium, but pays only if death occurs during the policy term. If the client survives beyond age 90, the cover ends while the IHT liability may remain.
Reviewable whole of life: may offer a lower starting premium, but future reviews can require higher premiums to maintain the benefit. If those premiums become unaffordable, the client may need to reduce their cover. That can happen late in life, exactly when replacement cover is hardest to obtain and most expensive.
A combination: a smaller guaranteed whole of life policy alongside term cover can reduce the initial cost while retaining a core benefit for life. The additional term benefit ends when the term expires.

The appropriate structure depends on how long the liability is expected to remain, the client’s circumstances and their ability to maintain premiums over time. The right answer is the one the client can sustain for as long as the liability lasts, not simply the lowest starting premium.

Using pension income to fund premiums

For clients with pension wealth they no longer need for retirement, drawing a regular income and using part of it to pay premiums on a policy in trust can be an efficient way to address the new liability. Where the conditions of the normal expenditure out of income exemption are met, those premiums fall outside the estate immediately, while the policy provides a lump sum for the beneficiaries outside the estate. The pension planning itself remains with you; we arrange the cover to sit alongside it.

Why timing matters

The cost of whole of life cover rises with age, and underwriting becomes more involved for clients in their 70s and beyond. Large sums assured also require financial underwriting, so cases typically take six to twelve weeks from application to acceptance. With April 2027 approaching, starting the conversation at the next client review, rather than the one after, can make a material difference to both price and availability.

Large lifetime gifts and Gift Inter Vivos cover

With pensions coming into the estate, more clients are likely to consider gifting during their lifetime. A lifetime gift may remain relevant to the IHT calculation if the donor dies within seven years.

How that affects the liability depends on the size of the gift. Where a gift exceeds the available nil rate band, tax can fall on the gift itself, and Gift Inter Vivos cover can provide funds to meet it, structured to reflect any applicable taper relief. Where a gift uses the nil rate band, it reduces the band available to the rest of the estate, so the additional liability falls on the retained estate instead. The cover structure needs to reflect which applies, and a separate level term policy for the retained estate is often arranged alongside.

Where a gift has already been made without cover, cover can still be arranged within the seven year period, sized to the liability that remains.

Existing cover not in trust

Life cover payable to the estate can increase the IHT liability, and access to the proceeds may depend on probate. Writing an existing policy in an appropriate trust can keep the payout outside the estate and accessible to trustees independently of probate. Transferring an existing policy into trust can itself be a gift for IHT purposes, so its value and any tax implications should be checked before proceeding.

Policies already in trust are worth reviewing too. The beneficiaries, the type of trust and the level of cover may no longer match the client’s plans, particularly where the estate has grown. Our page on trust advice explains how the main trust types work.

Clients moving abroad

Since April 2025, a residence based test has replaced domicile for IHT. Anyone UK resident for at least 10 of the previous 20 tax years is a long term resident, with their worldwide estate within UK IHT.

We’re seeing more clients consider a move abroad, but the IHT position can follow them. A long term resident who moves abroad remains within UK IHT on their worldwide estate for between three and 10 tax years after leaving, depending on how long they lived here. UK assets remain within scope regardless.

Cover is far easier to arrange while a client is still UK resident, and in some cases only possible then. If a client is planning to relocate, it is worth reviewing their protection before they go. A term policy matched to the expected tail period can be a cost-effective way to cover the liability that follows them abroad.

Why advisers work with LDN Finance

Your planning identifies the liability. Rob Fox, our Protection Director, and our Protection team arrange the cover to fund it, while you retain the wider planning relationship.

The relationship stays with you: you remain your client’s adviser on the wider planning, and we keep you informed on progress.
Experienced with high net worth clients: we arrange large sums assured from across the whole of the market, manage the underwriting and place the policy in trust.
Underwriting expertise: older clients, medical histories, international connections and very large sums assured are where we add most value. We know which insurers are best placed for each, and we manage disclosures and financial underwriting from start to finish.
Indicative costs before an introduction: share an anonymised outline and we can give you an early view of likely cost and structure, so you can raise it with your client knowing it is realistic.
Working alongside the client’s solicitor: we set up the trust on the policy and work with the client’s legal advisers so it fits their wider estate plan.
No advice fee for your client: LDN charges no advice or broker fee for arranging protection, including placing it in trust. Premiums are paid to the insurer. We are paid by commission from the insurer, which is disclosed to your client before any policy starts. We will look after any of your clients regardless of size.
Clear timescales: we set expectations on underwriting from the outset and keep you updated at each stage, so your planning timetable is not held up.

Our IHT protection review

When you introduce a client, our IHT protection review covers:

the projected liability, using the figures from your planning
the level and duration of cover needed to fund it
guaranteed whole of life compared with the alternative structures above
indicative underwriting terms from the insurers best placed for the client
the trust arrangements, agreed alongside the client’s legal advisers

It gives you something specific to offer your client: an expert review of how their projected IHT bill could be funded, with the wider planning staying with you.

If these issues are coming up with your clients, we would welcome a conversation about where protection fits alongside your planning. Request an IHT protection review using our enquiry form, and our team will put you in touch with Rob Fox, our Protection Director. If you already have a client in mind, include a brief outline of their circumstances, and we will come back to you within one working day with an initial view and indicative costs.