Life Insurance for Inheritance Tax (IHT): Creating the Cash Your Executors Need - Without Selling the Family Home
When someone dies, two clocks start: probate and IHT. The tax is usually due by the end of the sixth month after death, and interest applies after that, often before probate completes. If much of the estate is tied up in property or other illiquid assets, raising cash fast can be stressful and disruptive.
A practical solution is life insurance structured for IHT: it doesn’t reduce the tax due, but it can provide the lump sum to pay it, so your family doesn’t need to sell a home, a long-term investment, or a sentimental asset at the worst possible moment.
The IHT & Probate “Cash Gap” (in brief)
IHT is typically 40% on the estate value above the available allowances (e.g., £325,000 nil-rate band plus any residence nil-rate band if applicable).
Direct Payment Scheme: some IHT can be paid straight from the deceased’s bank/investment accounts before probate, but it may not cover everything.
Instalments: HMRC allows annual instalments (e.g., on property) for up to 10 years, usually with interest; any remaining tax is due in full once the asset is sold.
How Life Insurance Helps
Think of insurance as liquidity. Set at the right level, a policy can pay out the cash your executors need to settle IHT promptly, avoiding forced sales and giving your family time to make good decisions about property or investments.
Key point:
Insurance funds the bill; it doesn’t cut the bill.
Put the Policy in Trust
Most life policies count as part of the estate unless they’re written in trust. A policy in trust is usually outside the estate, can often bypass probate, and pays out faster to trustees/beneficiaries, exactly when cash is needed for HMRC.
Which Policy
Whole of life (often joint life, second death): for a permanent IHT need; pays whenever death occurs (on second death for couples).
Term assurance: for temporary needs (e.g., while you plan to sell a property or during the seven-year period after gifting).
Whatever you choose - write it in trust so funds are available quickly and usually outside the estate.
Because premiums are influenced by age, health, lifestyle and the cover selected, applying earlier can help you secure more affordable premiums, subject to underwriting and ongoing affordability.
Ideal When Estates Are “Asset-Rich, Cash-Poor”
If your wealth sits in property, business interests, or long-term holdings, insurance can protect family homes, heirlooms, and worthwhile future investments from a forced sale just to meet an IHT deadline.
How ERF can help
At Ella Rose Financial, we’ll model your likely IHT exposure under different scenarios and translate that into a sensible level of cover. We then recommend an appropriate policy and ownership structure, coordinate trust paperwork with your solicitor where needed, so funds can be accessed promptly, and keep everything under regular review so the plan remains suitable, affordable, and aligned with changing values and rules.
If you are concerned about the ever changing IHT landscape, please do get in touch for a no obligation conversation.
Important
This article is information only, not personal advice. Tax and trust rules can change and depend on your circumstances.
Premiums/acceptance depend on underwriting (age, health, lifestyle). If you stop premiums, cover ends. Most policies have no cash-in value.
Trusts carry duties and potential tax reporting; take legal advice.
The information enclosed in this blog is based on current HMRC guidance: thresholds/allowances, payment deadlines, Direct Payment Scheme, and instalments with interest.
The Financial Conduct Authority does not regulate Tax and Trust Planning.