Take Insurance to Protect Against IHT
May 02, 2025
Families turn to life assurance to swerve inheritance tax reforms.
Labour executes ‘economic own goal’ as taxpayers shield cash in death policies
Tax planning has taken a large part of families’ inheritance discussions since Rachel Reeves’s Budget, experts say Credit: Kirsty O'Connor / Treasury
Britain’s wealthy are being pushed towards “whole of life” cover to reduce the pain of inheritance tax in an “economic own goal” for Labour, tax experts have said.
Wealth managers said they are preparing for a surge of life assurances being set up in trusts, reducing the pressure of inheritance tax on taxpayers and their descendants.
So-called “whole of life” cover set up in a trust sits outside a person’s estate and is therefore not liable for death duties at a rate of 40pc.
Unlike life insurance, which only covers a set term, life assurance covers an entire life. It pays out a guaranteed amount of cash to beneficiaries upon death, giving it “major benefits” for tax purposes, tax experts said.
Jo Eccles, of London buying agency Eccord, said: “Since the Budget, tax planning is a bigger piece of the conversation than it’s ever been among our high-net-worth clients buying property.
“It’s now practically unheard of for us to acquire a property over £10m without working closely with the client’s tax adviser to ensure the purchase is structured in the most tax-efficient way.
“Our clients like life assurance to be part of their overall tax planning because they’re comforted by the fact it will give their beneficiaries breathing space, without the need to fire-sale assets to cover inheritance tax bills.”
Nicholas Hyett, of investment firm Wealth Club, said that by paying out a lump sum in the case of an unexpected death, life assurance can be used to ensure there is enough cash around to pay inheritance tax bills without having to sell assets.
He added: “That’s particularly important in the case of things like family businesses or farms, where selling assets is difficult or perhaps impossible at short notice.”
However, Mr Hyett warned that a move to life assurance represented “a bit of economic own goal” from Labour, as “instead of being invested in productive assets, creating jobs and boosting growth, money is being tied up in tax management products”.
The Chancellor announced in her maiden Budget that unused pension pots would be treated as part of a person’s estate from April 2027 and therefore be subject to inheritance tax. Rachel Reeves also capped inheritance tax relief for farmland at £1m, to much uproar from British farmers.
Peter Ferrigno, of advisory firm Henley & Partners, said: “The recent changes have highlighted how inheritance tax is not working in practice. The rates are among the highest in the world and cut in at a very low level.
“The probate process is also too slow, and inheritance tax needs to be paid before the beneficiaries can get access to the assets to sell. Life insurance is the only way to unblock that.”.
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