Understanding Whole of Life Insurance: How to Protect Your Estate and Loved Ones from Inheritance Tax (IHT) in the UK

The Problem: Inheritance Tax and the Hidden Costs for Families

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Inheritance Tax (IHT) is a significant financial burden for many families in the UK, particularly with rising house prices and increasing estate values. In 2023, a staggering £6.1 billion was paid in IHT, an increase of 10% compared to the previous year. With the threshold for IHT set at £325,000 for individuals and £650,000 for married couples, many estates are now exposed to this tax, often unexpectedly. To make matters worse, changes in tax rules are only adding to the problem.

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Hefty IHT Bills: Real-World Impact on Families

Consider the case of Jane and Mark Thompson, a couple who passed away in 2024. Their estate, consisting of a house worth £1.2 million, savings, and investments, had an overall value of £2.5 million. Due to the rising value of their home, their estate was subject to a whopping IHT bill of £375,000. This was a heavy burden for their two children, Sophie and Adam, who had to scramble to come up with the funds. The situation became even more stressful because they hadn’t planned for the IHT liability, and the life insurance they had was inadequate to cover the bill.

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Changes to APR and BPR: Are Your Assets at Risk?

In recent years, there have been significant changes to Agricultural Property Relief (APR) and Business Property Relief (BPR), both of which were historically used to reduce IHT liabilities. From 6 April 2026, the government announced that Business Property Relief (BPR) and Agricultural Property Relief (APR) at 100% will be capped at £1 million of qualifying assets. After the first £1 million of qualifying assets, the relief will be effectively reduced by 50%, meaning that the IHT payable could still be substantial.

For APR specifically, the Labour government has announced that from April 2026, APR for inheritance tax will be capped at £1 million. This means the full 100% relief will only apply to the first £1 million of combined agricultural and business property. The remaining value above £1 million will be eligible for 50% relief, effectively reducing the IHT rate to up to 20%. Additionally, the unused £1 million allowance will not be transferable after death. The definition of agricultural land for APR purposes will also be expanded to include land managed under an environmental agreement with the UK government.

These new rules will apply for lifetime gifts made on or after October 30, 2024, and will have significant implications for estates that rely on these reliefs to reduce their IHT bills.

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Estate Tax Changes: Estates Over £2 Million

The situation is made even more complex by a looming rule regarding estates over £2 million. If your estate exceeds this threshold, the tax-free allowance for IHT begins to taper down. As the average house price in the UK continues to rise, more families are now at risk of breaching this threshold. In London and the South East, properties worth over £2 million are becoming more common, and these families are faced with substantial IHT bills when they inherit their loved ones' estates.

According to recent reports, more than 30% of all estates in the UK now exceed £1 million, and this number is expected to rise dramatically over the next decade. The change in tax rules only exacerbates the situation, with increasing numbers of people who would have once avoided IHT now finding themselves with a hefty tax bill.

 

 

The Exposure for Future Generations

Looking ahead, future generations will likely be exposed to even higher IHT bills. With house prices continuing to rise and more people living longer, the value of estates is increasing, and many children will face hefty IHT liabilities when they inherit family homes. Families who have not planned for IHT risks may find themselves struggling to pay the taxes on estates worth millions.

Take, for example, the case of the Millers, whose home in the North West is now worth £1.8 million. Their son, Daniel, recently inherited the property after both parents passed away. However, despite living in the property, Daniel was forced to sell a portion of the land to pay the IHT bill. The tax bill alone exceeded £150,000, and because the family hadn't taken the necessary steps to protect the estate, Daniel had no choice but to part with a beloved part of his inheritance.

The Solution: Whole of Life Insurance to Protect Your Estate

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So, what can you do to ensure your estate isn't subject to a massive IHT bill? One of the most effective solutions is Whole of Life Insurance, especially policies written in trust. Whole of life insurance provides a guaranteed lump sum payout to your beneficiaries upon

your death, and it can be used specifically to cover IHT liabilities. There are two primary types of whole-of-life policies to consider:

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• Whole of Life Second Death Policy: This policy ensures that a lump sum is paid to your beneficiaries upon the second death (usually the surviving spouse). This means that the payout occurs when both partners have passed away, and the funds can be used to settle IHT on the entire estate.

• Single Policy for Single People: If you're a single person, a whole of life policy written in trust can offer the same benefit. Upon your death, the policy payout goes directly to your beneficiaries, helping them cover IHT costs without the stress of selling assets or using savings.

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Why Written in Trust is Crucial

To ensure your life insurance policy delivers the maximum benefit, it’s essential that the policy is written in trust. By doing this, the proceeds from the policy are paid directly to your beneficiaries without forming part of your estate. This means the payout will not be subject to IHT, providing a vital source of funds to cover any tax liabilities.

Without a policy written in trust, your life insurance payout could be added to your estate, which might increase the IHT payable on your total estate value. By writing it in trust, you can ensure that the money goes directly to the people who need it, tax-free and without delay.

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It pays to be proactive

With IHT bills increasing, and the exposure to higher taxes growing, it’s crucial to plan for the future. Whole of life insurance written in trust can protect your family from the devastating financial consequences of inheritance tax. Whether you're single or married, with or without children, a policy written in trust ensures that your estate goes where you want it to, without the unnecessary burden of taxes.

Don’t wait until it’s too late, start planning today. Contact us to discuss how whole of life insurance written in trust can help secure your legacy, protect your loved ones, and minimize IHT exposure. Your future family will thank you for it.