Life insurance doesn’t directly reduce a person’s IHT liability (though the premiums will if they are exempt as Normal expenditure out of income (NEOI)), so what is the need for it with respect to IHT planning? There are two key reasons – the provision of liquidity and certainty.

Liquidity

If an IHT bill is not paid by the end of the sixth month after the person's death, daily interest will be charged (at the Bank of England’s Base Rate + 4%). Even where extensions are granted (for example to pay the bill in 10 annual instalments) interest will still be charged.

The Personal Representatives (PR) of a person’s estate (the Executor if the deceased died with a will, or the Administrator if they died intestate) are responsible for reporting and paying IHT, and probate will not be granted until any IHT due is paid.

And this is the catch-22 situation - most of a deceased’s assets (for example their property) can’t be accessed by the PRs to pay the IHT bill until probate is granted but probate won’t be granted until the IHT is paid.

If they don’t have the means to pay the IHT the PRs might need to borrow money, for example by way of a probate bridging loan which can be complex and expensive.

Life insurance held in trust (which it must always be when used for IHT purposes as otherwise it will merely exacerbate an IHT liability) will expedite the funds for the PRs to pay the IHT bill without needing to wait for probate to be granted.

There are exceptions to the rules that may be granted in some circumstances, for example:

• HMRC may agree to allow IHT on particularly illiquid assets such as property to be paid in 10 annual (interest-bearing) instalments
• Some liquid assets (for example cash held in a bank account) may be accessible to pay IHT prior to probate being granted
• From April 2027 PRs may be able to direct pension scheme administrators (PSAs) to withhold 50% of a pension for up to 15 months

The key word in all these instances is ‘may’; there is no certainty, and therefore it is impossible to plan effectively for them. And interest will continue to roll-up if the IHT bill isn’t paid within 6 months regardless.

Life insurance in trust provides the funds for the PRs to be able to quickly settle the IHT bill, giving them certainty and peace of mind.

The ‘residual estate’ is essentially the net value of a person’s taxable assets after everything else has been accounted for. The IHT liability is typically 40% of the residual estate, and life insurance can be put in place to provide liquidity and certainty.

From April 2026 the residual estate will include 50% of the value of business and agricultural assets not fully relievable from IHT, and from April 2027 also the full value of unused pension pots and taxable death benefits.

The appropriate type of life cover to put in place to cover a residual estate liability will depend on the client’s situation and financial planning objectives:

There is no IHT liability on transfers of assets between spouses or civil partners, so joint life cover payable on second death (JLSD) is typically required, regardless of the type of product.

Further detail on these products is provided on the products and underwriting page.

Transfers of value, whether to another person or to a trust, may give rise to IHT if they are not otherwise exempt (as explained earlier). For gifts of jointly owned assets a share (usually 50%) is attributed to each donor, and they are treated as separate gifts.

PETs are gifts made to an individual or a bare/absolute trust, and IHT is payable if the donor/settlor made the gift less than 7 years before they died and had gifted more than their available Nil-Rate Band (NRB) in that period. The full value of the ‘failed PET’ will be counted back into the donor’s estate, and the recipient of the gift will be liable for the IHT.

CLTs are gifts made to a relevant property trust, e.g. a discretionary trust. They are subject to a 20% entry charge where the value of the CLT - when added to any other CLTs made by the settlor in the prior 7 years - exceeds the settlor’s available NRB. The settlor will be liable to the IHT, though the trustees can pay it if preferred.

If the settlor then dies within 7 years the full value of the ‘failed CLT’ will be counted back into their estate, and IHT will be payable by the trustees at 40% on the excess over the settlor’s NRB (less a credit given for any IHT paid at 20% upon entry).

If the donor of a failed PET or CLT dies within 3 years IHT will be payable at 40%. However, if they die between years 3-7 taper relief will apply, reducing the rate of IHT payable (not the value of the gift) and therefore the IHT liability by 20% per year:

Taper relief does not apply to gifts that fall within the donor’s available NRB, as there is no tax liability in the first place (though the gift will reduce their available NRB).

A GIV policy is one which mirrors the reducing IHT liability on a gift, typically structured as a series of Level Term policies, with terms of 3, 4, 5, 6 and 7 years, each for 20% of the initial IHT liability. The total sum assured therefore reduces by 20% between years 3-7.

The cover may be taken out by the donor and written in trust for the benefit of the recipient, or by the recipient on the life of the donor (‘life of another’ basis). Either way the premiums can be paid by either the donor or the recipient.

For example, your client has made a gift of £500,000 to their grandchildren. Assuming they haven’t made any other gifts in the last 7 years the gift is £175,000 over their NRB, which would give rise to an initial IHT liability of £70,000, i.e. £175,000 x 40%.

To cover the IHT liability over the next 7 years they could take out a GIV policy as follows:

After year 3 one of the policies will fall away each year, and the total cover will fall in line with the reducing IHT liability. The total premium payable will also reduce as a result.

You can use our GIV calculator to assist with the calculations:

• Gift Inter Vivos calculator (56.2 KB/XLSX)

If a client takes out a joint life second death (JLSD) term policy with us to cover their residual IHT liability and then later makes a gift(s), our GIV carve-out option will allow them to convert some of the JLSD cover into a new GIV policy/cies without the need for further underwriting. The JLSD cover will reduce by the total sum assured of the new GIV policy.

Business Relief (BR) isn’t just available to small business owners - investors in qualifying businesses can benefit too; but of course, investing directly into a small, unquoted business is not feasible for most individual investors.

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are government initiatives which encourage investment into small businesses to aid their growth by affording certain tax benefits to investors.

Some investment providers also offer access to BR qualifying funds, which allow investors to benefit from their specialist research and knowledge, and cost-effectively diversify their risk across a portfolio of BR qualifying businesses.

The first £2.5m (per person) invested into these schemes is free of IHT after 2 years (assuming the investor doesn’t have any other business or agricultural assets on which they would claim relief), and as such they are popular estate planning vehicles for those wanting to get capital outside their estate for IHT purposes as quickly as possible.

Some providers also offer Alternative Investment Market (AIM) funds, which only attract 50% IHT relief (after 2 years).