With inheritance tax (IHT) thresholds frozen and sweeping changes coming into force by 2026 and 2027, more individuals are turning to life insurance as a strategic tool to protect their families and preserve wealth. But is it the right solution for you?
Understanding the Changing IHT Landscape
Inheritance tax remains one of the most contentious and complex aspects of wealth transfer. As of 2025, IHT is levied at 40% on the value of estates above the £325,000 nil-rate band (£650,000 for married couples or civil partners).
With thresholds frozen until at least 2028 and inflation continuing to push up asset values, more estates than ever are falling into the IHT net.
Key changes under Labour’s tax reforms now add significant urgency:
- April 2026: Business and agricultural property relief will only apply to 50% of qualifying assets above £1 million.
- April 2027: Defined contribution pensions will be brought into the taxable estate, removing what was previously a major IHT exemption.
This means pensions—once seen as a reliable method for wealth transfer—will now contribute to your tax exposure, creating a fresh layer of complexity for retirement and estate planning.
How Life Insurance Fits into Estate Planning
Life insurance doesn’t reduce the tax bill itself—but it provides liquidity for your heirs to pay the tax without delay. This can be critical when an estate is asset-rich but cash-poor (for example, with property or business holdings).
At Blacktower Financial Management (DIFC), we help clients structure life insurance policies so that:
- The sum assured aligns with your potential tax liability
- The policy is written into a trust, ensuring it falls outside your estate and is exempt from probate
- The payout is available immediately upon death, giving beneficiaries the ability to settle HMRC demands without disrupting core assets
By taking this approach, we help clients avoid common pitfalls, such as:
- Overpaying for cover relative to projected liabilities
- Forgetting to place the policy in trust, which would render the payout itself subject to tax
- Relying solely on insurance rather than integrating it into a wider tax and succession strategy
Types of Life Insurance for IHT Planning
| Type | Description | Use Case |
| Whole of Life Insurance | Pays out on death, whenever it occurs. | Suitable for permanent tax liabilities. Predictable and reliable. |
| Term Insurance | Pays out only if death occurs within a defined term (e.g., before age 90). | Lower cost. Useful when covering expected liabilities for a known duration (e.g., seven-year rule). |
| Gift Inter Vivos Insurance | Cover declines over time. Matches IHT taper relief on gifts. | Designed to protect beneficiaries if death occurs within seven years of a major gift. |
A properly structured whole of life policy with inflation-linked cover may be suitable for clients with high-value estates that will remain over the threshold indefinitely.
Meanwhile, gift inter vivos policies are ideal for clients who are engaging in lifetime giving but want to ensure loved ones won’t be hit with an unexpected tax bill if they pass away before the seven-year mark.
Where Indexed Universal Life Insurance (IUL) May be a Consideration
For internationally mobile individuals or high-net-worth expats with long-term estate planning needs, Indexed Universal Life Insurance (IUL) may offer a more flexible solution than traditional life cover. An IUL policy combines permanent life insurance protection with a cash value component that grows based on the performance of a selected equity index, such as the S&P 500, without directly investing in the market. This can appeal to clients who want the dual benefit of life cover plus a tax-efficient growth wrapper.
We help clients assess whether IUL suits their broader goals, especially when:
- They have cross-border exposure, and need a portable solution not tied to a single jurisdiction
- They are seeking US dollar-denominated protection as part of an international strategy
- They want the option to accumulate value within the policy to fund future gifting, retirement, or succession planning
While not suitable for every client, IUL can be a valuable tool when used within a carefully structured estate plan, particularly for younger, higher-income individuals seeking flexibility, capital growth, and tax-efficient wealth transfer over the long term.
Client Case Study: Estate Preservation in Action
A recent client, a 67-year-old retiree with substantial pension assets and rural property, approached Blacktower concerned about rising IHT exposure, particularly after pensions were added into the taxable estate.
Working with our advisers, we structured a plan that included:
- Two term life insurance policies, each providing £50,000 in cover, expiring at age 90
- Policies written into trust, keeping proceeds outside the estate
- Combined annual premium of £1,217—affordable and targeted
- Parallel gifting strategy to reduce taxable estate over time
Crucially, we also reviewed his defined contribution pensions and advised on spousal and dependent beneficiary nominations, rebalancing investments, and the use of surplus income exemptions to fund family support in a tax-efficient manner.
Is Life Insurance Always the Right Answer?
Not always. While insurance can be an effective tactical solution, Blacktower’s approach is always holistic.
We consider:
- Client age and health – older clients may face steep premiums
- Estate composition – liquid vs illiquid assets
- Existing tax allowances and reliefs
- Cross-border estate implications (especially for expats and international families)
- Potential for future care needs or gifting strategies
For example, if a client is aged 78, in good health, and looking to make gifts to grandchildren, it may be more effective to use trust structures or surplus income exemptions than to commit to high-cost insurance premiums.
What Does Writing a Policy Into Trust Actually Do?
Many individuals take out insurance policies without understanding that unless the policy is written into trust, it may be added to their estate and taxed at 40%.
At Blacktower, we help clients:
- Draft and submit appropriate trust documents
- Choose trustees and beneficiaries
- Integrate trust planning into their wider estate and investment structure
This simple step can save families tens of thousands of pounds in unnecessary tax and probate delays.
Why Blacktower?
Founded in 1986, Blacktower Financial Management has helped generations of clients manage, preserve, and pass on their wealth. Whether you’re UK-based or living overseas, we offer:
- Specialist advice on UK inheritance tax, pensions, and gifting
- Expertise in cross-border estates and international tax coordination
- Direct access to life assurance, trust structuring, and wealth transfer tools
- A personal adviser to walk with you every step of the way
As estate planning becomes more complex in 2025 and beyond, Blacktower’s bespoke guidance ensures that your plans are robust, tax-efficient, and tailored to your family’s needs.
Schedule an Estate Planning Review
If you’re concerned about inheritance tax, rising premiums, or the impact of recent Budget changes, now is the time to act.
Speak to a Blacktower adviser today to explore:
- Whether life insurance should be part of your strategy
- How to optimise your pension and gifting decisions
- Ways to protect your family from unexpected tax burdens
Contact us for a complimentary consultation.
Disclaimer: Blacktower Financial Management (DIFC) Limited is regulated by the Dubai Financial Services Authority (DFSA). This blog is for general information purposes only and does not constitute legal, tax, or financial advice. You should seek independent advice from qualified professionals before making any decisions based on its contents.
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