How to Put Life Insurance in a Trust UK: A Practical Guide

The bottom line is this: failing to put your life insurance policy in a trust can cost your family tens of thousands of pounds — sometimes more — in unnecessary tax. I’ve seen it time and again. Families thinking their loved one’s life insurance payout will slip directly to them, only to discover it’s tied up in probate or taxed by HMRC. So, what’s the catch? Why is writing a policy in trust so critical? And how do you actually go about it?

Estate planning in the UK has grown complicated over the years, especially with rising inheritance tax (IHT) thresholds barely keeping pace with inflation and property prices. Using life insurance correctly, particularly with tools like irrevocable trusts, can be a powerful way to protect your assets and ensure that your loved ones get exactly what you intended.

The Growing Complexity of UK Estate Planning and Inheritance Tax

First, some context. The UK inheritance tax regime is no joke. When someone dies, if their estate exceeds the £325,000 nil-rate band, HMRC can charge 40% tax on the excess. Add in the residence nil-rate band (up to £175,000 for passing a home to descendants), and you might avoid the tax on some assets — but many estates still end up with significant IHT bills.

Here’s the kicker: life insurance payouts form part of the deceased’s estate unless they’re held correctly. That means, without proper planning, the insurance money meant to cover IHT bills could itself get taxed or delayed.

Why you might need life insurance for IHT

Life insurance isn’t just for income replacement after you’re gone. It can specifically fund anticipated IHT liabilities on your estate, meaning your loved ones won’t have to scramble to pay HMRC or sell off assets in a rush.

But not all life insurance policies serve this purpose equally. Let’s break down the three main types you might encounter:

Whole of Life Insurance: This covers you for your entire life, paying out a lump sum whenever you die. It’s perfect if your goal is to leave a guaranteed inheritance or cover IHT that might come many decades down the line. Term Insurance: Provides coverage for a fixed period (say, 20 or 30 years). Good for covering liabilities like a mortgage or income protection during child-rearing years. Family Income Benefit: Pays out a regular income to beneficiaries over the term — rather than a lump sum — helping with ongoing expenses rather than lump sum bills.

Sounds simple, right? Well, the real trick isn’t just picking the right product but ensuring the proceeds avoid the probate process and immediate tax. And this is where the crucial concept of writing a policy in trust enters the picture.

What Does 'Writing Life Insurance in Trust' Actually Mean?

When you take out a life insurance policy, you are the policyholder and typically the beneficiary. The issue is, your estate is the legal beneficiary by default unless you assign those rights to savingtool.co.uk someone else. By putting the policy into a trust, you legally separate the ownership of the payout from your estate.

This means the insurance money will go directly to the trust’s beneficiaries — usually your family — without being subject to probate or IHT. Plus, the money can be accessed faster, which really helps the family in those difficult months after a loss.

Types of Trusts You Can Use

Most life insurance policies settled in trust are placed in irrevocable trusts UK. Why irrevocable? Because once you transfer the policy this way, you no longer own or control it — which is precisely what keeps it out of your estate for tax purposes.

Here’s a quick rundown:

Discretionary Trust: Trustees have flexibility over who gets the money and when. Useful if your family situation might change. Bare Trust: The beneficiaries are fixed, and trustees pay the proceeds to them outright and immediately. Interest in Possession Trust: A beneficiary has a right to benefit from the trust income or capital. Technical, but it offers some tax efficiencies in certain situations.

Choosing the right trust depends on your family needs and tax planning objectives.

Common Mistake: Not Writing Your Life Insurance Policy in Trust

Ever wondered why so many people leave a mess behind despite having life insurance? The most common stumbling block I see is this:

They take out a perfectly good life insurance policy but forget to place it in trust.

Here’s the kicker — without a trust, HMRC will count the payout as part of your estate. Families then face a double whammy: IHT bills on the estate, plus potentially long delays as the insurance has to go through probate before funds are released.

One real-life example I worked on involved a client with a £500,000 policy, whose estate was over the £325,000 nil-rate band. Because the policy wasn’t in trust, the family had to wait six months — during which time the house was tied up — before the payout was received, delaying IHT and creating serious cash flow problems.

Step-by-Step Guide: How to Put Life Insurance in a Trust in the UK

Sounds complicated? Let me break it down into practical steps:

Choose your life insurance policy: Decide between Whole of Life and Term Insurance, depending on your estate planning needs. For IHT, Whole of Life is often preferred. Consult a specialist adviser: Writing a policy in trust is a legal process. Your financial advisor or solicitor will draft the trust deed suited to your circumstances. Complete the trust form: When you apply for the life insurance, fill out the life insurance trust form provided by the insurer. This is a formal document establishing the trust. Assign ownership: Transfer ownership of the policy into the trust, making the trustees the policy owners and the beneficiaries the named beneficiaries of the trust. Keep records safe: Store the trust deed and all related documents securely. Your family or trustees will need these when making a claim.

Important: Annual Gifting Allowance and Trusts

While you focus on life insurance trusts, remember there are other estate planning tools to reduce IHT — such as the £3,000 annual gifting allowance. You can gift assets up to this amount each year without worrying about IHT, often alongside trust-planning strategies.

Combining gifting allowances with life insurance in trust can significantly reduce your overall estate's taxable value, freeing up more wealth to pass on to your heirs.

The Benefits of a Life Insurance Trust: What It Actually Means For You

Benefit Explanation Practical Impact Excludes policy proceeds from your estate Reduces estate’s value, lowering inheritance tax payable to HMRC More money goes directly to family, less disappears to tax Faster access to funds Policy pays out straight to trustees without probate delays Family can pay IHT bills or cover living costs immediately Control over who gets what Trustees manage distribution per your instructions Protects younger children or vulnerable beneficiaries Legal protection Trust structure shields payouts from creditors or divorce settlements Ensures inheritance stays within intended family members

Conclusion: Don’t Leave Money to HMRC – Use Trusts Properly

Here’s the hard truth: simply having life insurance is not enough. In today’s complex UK estate planning environment, without the policy being placed into an irrevocable trust UK-based, it’s very likely your family will get less and wait longer to receive what you worked hard for.

So, if you’ve ever asked yourself, “How do I put life insurance in a trust UK?” — the answer is simple: choose your policy, work with a specialist to draft the right trust, complete the insurer’s life insurance trust form, and check that the ownership transfer is registered correctly.

Doing this properly protects your family’s financial future, ensures you use your £3,000 annual gifting allowance and other exemptions effectively, and keeps HMRC’s hand out of your hard-earned legacy.

If you take one thing away from this, it’s this: when it comes to protecting your estate and family, writing your life insurance policy in trust isn’t optional—it’s essential.