IHT planning with Protection

Why more families are being caught by IHT

Frozen nil rate bands

The IHT nil-rate band (NRB) has been fixed at £325,000 since 2009, and the Residence NRB at £175,000 since 2020, and both are frozen until at least 2031. These allowances have not kept pace with rising asset values, reducing their real terms value every year.

Rising property and investment values

Residential property remains the biggest component of many estates. With strong price growth over the past decade, increasing numbers of families now find that even a modest home places them above the IHT threshold. When combined with the value of savings and investments, even middle income families are becoming exposed to IHT simply due to assets accumulated over time.

Formerly non-UK domiciled individuals

Since the scrapping of the domicile-based regime in April 2025 individuals who were previously non-UK domiciled but who have been resident in the UK for at least 10 of the last 20 tax years (and are therefore classed as ‘Long-Term Resident’) will now be liable to IHT on their worldwide assets, rather than just their UK assets as would previously have been the case.

Forthcoming reforms that will increase exposure

Business and Agricultural Property Relief

From April 2026, only the first £2.5m of combined qualifying business and agricultural assets will benefit from full IHT relief, and amounts above this will only receive 50% relief - therefore being liable to an effective 20% IHT rate. Many business owners, landowners and farming families who previously assumed their estates were protected may now face substantial IHT liabilities. In addition, AIM shares will only receive 50% relief regardless of value.

Inherited pensions and death benefits

From April 2027, unused pension funds and certain pension death benefits will be included in the value of an estate and therefore subject to IHT. Until now, pensions have often been left untouched because of their IHT advantages, but once this change takes effect many clients may find their estate value rises considerably for IHT purposes. The FCA’s Consumer Duty reinforces the responsibility to anticipate foreseeable harm and deliver good long term outcomes. Advisers must ensure that clients understand their future IHT exposure and that estate planning - including the valuable role of protection – is routinely discussed in client reviews.

The relevance of protection

Protection policies provide certainty and flexibility that many traditional estate planning tools cannot match. They offer clients control over their assets during their lifetime while delivering liquidity for beneficiaries to meet future IHT costs. Claim proceeds are themselves free of IHT provided the policy is written into trust.

Gift Inter Vivos (GIV)

Gifting remains an effective IHT mitigation strategy. Gifts are generally free of IHT after seven years, but if the donor dies sooner the beneficiary may have an unwelcome IHT bill to pay. GIV policies - typically arranged as a series of five Level Term policies - can be used cover the decreasing IHT liability.

Level Term

For clients who intend to gift or invest away their assets to eliminate their IHT liability over time, a Level Term policy offers the most cost-effective way to cover the liability. Some policies include a valuable option which allows part of the cover to be converted into a GIV policy as gifts are made, without any further underwriting.

Whole of Life (WOL)

WOL policies written in trust remain one of the most reliable solutions for IHT mitigation. They provide guaranteed premiums with a guaranteed sum assured regardless of the age at which the life assured dies, and the cost of the premiums will reduce the value of a client’s estate and therefore their IHT liability.

Convertible Term

A middle-ground between a standard Level Term policy and WOL, a Convertible Term policy locks in future insurability, allowing clients to convert their cover to WOL at a later date without requiring further medical evidence. This provides flexibility for clients who may not yet know whether they will need WOL cover.

Preparing for future

IHT liabilities Although some of the IHT reforms have not yet come into effect, we appreciate that some clients may wish to plan for their future IHT liability by taking out life cover now, to avoid the risk of having something happen to them in the meantime that would increase the cost of their premiums - or worse, make them uninsurable. We are happy to allow this, subject to satisfactory financial evidence of the future liability for applications over £2m.