Families are increasingly being driven to take out insurance against future inheritance tax bills amid rising property prices and a crackdown on reliefs and exemptions, Evelyn Partners says.
The Office for Budget Responsibility forecasts that around one in 10 deaths will be subject to inheritance tax by 2029/30, a significant increase from the 4.6% of deaths that paid the tax in 2022/23.
Inheritance tax receipts will reach £9.1 billion in the current 2025/26 tax year, but by 2030/31, annual revenue is projected to rise to £14.5 billion, marking a 67% increase over five years.
Ian Dyall, head of estate planning at Evelyn Partners, said: “The tightening of inheritance tax rules and reliefs will draw thousands more families into the scope of this contentious levy over the coming years.
“Together with the long-term freeze on nil-rate bands and gifting exemptions, this means not only that more estates will become liable for IHT, but also that more assets within liable estates will become taxable.”
Dyall said expanding inheritance tax liabilities are driving more families to take out insurance against a future bill so it does not become a burden to their beneficiaries.
Total life insurance premiums surged by 18% in the 2024/25 tax year, according to TWM Solicitors.
Dyall said: “Good estate planning can very effectively hold back the incoming tide of death duties, with a combination of reliefs, gifting and trusts being commonplace features of a strong strategy. But as the screw is being turned on reliefs and exemptions, more families and their advisers are now reaching for the security of insuring against the IHT liability.”
He continued: “Homes have often been sold in the most distressed circumstances to pay unexpectedly large IHT bills, and more families are looking at life cover to address a future IHT problem, especially where tax planning has reached its limit and a significant bill will land on beneficiaries at death.
“That has always been the case, but life insurance has become increasingly useful in recent years as nil-rate bands have remained frozen while asset prices, particularly property, have soared. And it is only becoming more important as exemptions and reliefs are whittled down, making it more difficult for tax planning alone to protect assets.”
In April this year, combined Business and Agricultural Property Relief will be limited to £2.5 million, creating challenges for business owners, while from April 2027, unspent pension assets will be included in estates for inheritance tax calculations, raising the prospect of substantial tax bills at death for those who have built up significant defined contribution pots.
Dyall said that the challenges of relying on gifting to mitigate inheritance tax is not only the fact they could still be taxable if the person does not survive seven years, but for gifts to be effective they must surrender all interest and not benefit from them afterwards.
“This can understandably leave some elderly savers feeling unsure about offloading large parts of their estate. We always advise those considering significant gifting to think first about themselves, their plans, and their ongoing financial needs. Trusts can play a key role in easing these concerns, and so can life cover, as it should allow you to retain ownership of more assets while removing the IHT headache,” he said.
According to Evelyn Partners, the most common way a life policy is used to reduce inheritance tax is through a whole-of-life policy written in trust. The cover is designed to match the expected inheritance tax exposure after reliefs and exemptions, and is often used alongside steps to reduce liability, such as lifetime gifting.
Premiums are paid during lifetime, and because the policy pays out on death, the family has the security of knowing that funds will be available to pay the tax bill when it arises, preventing any forced sale of assets, the firm explained.
Life cover can also be used tactically to support larger lifetime gifts, which are subject to the seven‑year rule and could therefore still be taxable if the donor dies within this period.
“‘Life cover does not replace good planning; it supports it by dealing with the elements that planning cannot fully remove and by creating certainty. The better the underlying planning, the smaller the amount of life cover required and the more manageable the premiums become,” Dyall added.
