We explain how a carefully arranged policy can protect family outcomes when a firm’s value is tied up in shares or property.
Many owners hold wealth in a company rather than cash. That can create a problem if a sudden bill hits the estate. In the UK, charges apply if the estate exceeds the nil‑rate bands and the excess may be taxed at 40%.
This buyer’s guide will show what a policy can do well — provide quick cash to meet a bill — and what it cannot do alone without the right structure. We will cover policy type, sum assured, trust setup and who should be involved: executors, trustees and advisers.
We keep the focus on practical steps to protect your family, not on tricks. For a useful background, see our detailed guide which explains trusts and timing in plain English.
Key Takeaways
- Put the policy in trust to keep the payout outside the estate.
- Whole‑of‑life cover is usually needed to guarantee a payout.
- Match the sum assured to the expected liability and thresholds.
- Trustees and advisers should be notified of your plans.
- Planning aims to protect family outcomes, not to remove responsibility.
How inheritance tax works in the UK when business assets form part of your estate
We explain what HMRC counts towards your estate and why that matters if you hold company value.
Your estate is the total of possessions minus debts when you die. That can include shares, investments and a policy payout unless it is put into trust.
What HMRC treats as part of the estate
Included: property, shareholdings, cash, investments and certain payouts.
Excluded if in trust: some policy proceeds and assets held outside your name.
Key bands and the 40% rate
- The nil-rate band is £325,000.
- The residence band can add up to £175,000 when you leave a main home to children or grandchildren.
- Amounts above available bands are usually charged at 40% — only the excess is taxed.
Spouses and civil partners can pass assets between them free of charge and unused allowances can be transferred. This often means many families only face a charge after the second death.
Why business assets can create an inheritance tax liability for your family
A. When shares or partnership stakes make up most of your wealth, a headline valuation can hide a serious cash shortfall at death.
Unlisted company shares and AIM holdings often carry that risk. They can be hard to sell quickly and may have big swings in value.
Partnership interests and some private investments can be equally illiquid. That means heirs may face a real liability even if the holding seems valuable on paper.
Shares, AIM positions and where the risk arises
Key red flags include recent acquisitions, concentrated holdings and unclear sale rules. These make it harder to raise cash when a charge falls due.
Partnership interests and common scenarios
Partners may have capital tied up in trading or joint ventures. That can delay realising value or force a rushed sale at a low price.
Why the first two years are critical
Under current rules, reliefs such as Business Property Relief may not apply immediately. Dying within two years of buying a qualifying interest can leave the estate exposed to a 40% IHT rate on the value that is part of the estate.
- Valuable on paper, but poor liquidity creates practical problems.
- Market moves and valuation jumps can increase your family’s potential liability.
- Recent purchases, concentrated holdings or no shareholders’ agreement are red flags — act now to protect people you care about.
life insurance for inheritance tax on business assets uk: what it is and when it’s worth considering
We explain the practical purpose.
What this cover does: it creates a lump sum that your family can use to pay an IHT bill without selling shares, breaking up a partnership or using the home as collateral.
This is most useful when an estate is large, holdings are illiquid or there is limited time before reliefs apply. A single payout can plug a cash shortfall quickly and give executors breathing space.
Who it helps: directors, owners of unlisted or AIM holdings and partners with concentrated capital. It is less relevant for smaller estates that sit below the thresholds.
Planning for children and next of kin
There is generally no charge between spouses or civil partners. That means many families plan around the second death, when children or next of kin might face a bill.
This approach protects more than the firm. It can safeguard the family home and avoid forced sales that reduce long-term money for heirs.
When to consider cover
- Large estates where a 40% charge would be significant.
- Illiquid holdings that are hard to convert quickly.
- Short timeframes, such as the two-year window affecting reliefs.
| Scenario | Reason to use cover | Expected outcome |
|---|---|---|
| Director with unlisted shares | Shares hard to sell quickly | Cash available to settle a bill without selling stake |
| Partner in a joint venture | Sale would disrupt trading | Business continuity preserved; family protected |
| Owner with high property value | Home at risk if funds needed | Home retained; heirs avoid forced sale |
We recommend speaking to an adviser early. For a broader perspective, see this planning guide that covers practical steps and trust options.
How life insurance can be used to pay inheritance tax without waiting for probate
The clock on an IHT payment can run out long before shares or property can be sold to raise funds. We explain how a policy can bridge that gap so families are not forced into a rushed sale.
Why the six‑month deadline matters
Inheritance tax usually needs settling within six months of death. That creates pressure when the estate is tied up in illiquid holdings.
Probate delays and shortfalls
Probate often takes about 16 weeks and can stretch longer. If a payout forms part of the estate, access may be delayed while executors wait for the grant.
Using the payout to avoid forced sales
When a policy is written in trust it can be paid more quickly and sit outside estate processes. That cash is then available to settle the IHT bill.
- Clears the immediate bill so heirs keep the family home.
- Prevents hurried sales of shares or other assets.
- Helps maintain ownership while valuations or shareholder talks continue.
We also stress communication. Tell executors and trustees where paperwork lives. Even without probate, insurers need documents. Good records speed payment and protect your family’s future.
Putting a life insurance policy in trust to keep the payout outside your estate
A policy held in your name can accidentally swell a taxable estate unless you act early. Unless a written trust is in place, a payout may be treated as part estate and increase a charge. Placing a policy in trust usually keeps the sum outside estate processes.
How a trust works
Trustees are the legal owners. They claim the payout and manage distribution. Beneficiaries are the people who will receive the money.
Speed and access
A policy trust can speed access. Payouts can arrive in weeks rather than months while probate proceeds. That quick cash can prevent rushed sales or unwanted borrowing.
Trust set-up basics
The two key documents are the trust deed and your letter of wishes. The deed is the legal framework. The letter of wishes guides trustees about who should benefit.
| Item | Purpose | Typical choice |
|---|---|---|
| Type | Control distribution | Absolute or discretionary |
| Beneficiaries | Who benefits | Named individuals or a group |
| Documents | Sets rules | Written trust deed and letter of wishes |
| Timescale | Access after death | Weeks, not months; trustees act |
Common errors include leaving a policy untrusted or naming beneficiaries who won’t cover the bill. Trust choices are hard to change, so we recommend professional advice before you sign.
Choosing the right policy type for business-asset inheritance tax planning
Start by asking whether you need certainty that a payout will come at any stage, or just for a short window. That decision guides whether a whole‑of‑life or a term product is the better match.
Whole of life cover for long-term liabilities
Whole of life policies pay whenever death occurs. They are suited to long-term exposure where the probable amount due may arise many years ahead.
We favour this when the goal is reliable funding without timing risk. Trustees can use the cash quickly and avoid forced sales.
Level term cover for short relief windows
Level term can work well where a fixed exposure exists for a set number of years. A common example is the early period before certain reliefs apply.
This gives certainty of the sum for that window, without the higher cost of whole‑of‑life cover.
Single life vs joint life, second death
Single life policies suit individuals who expect the charge to fall at first death. Joint life, second death policies often suit couples where the burden will arise after the survivor dies.
Choose the structure that mirrors who is most likely to carry the liability.
Why decreasing cover can be unsuitable
Decreasing cover reduces the sum over time. That makes sense where the amount due falls, such as a mortgage reducing.
Where the likely amount stays the same across a short window, decreasing cover can leave a shortfall. We caution against it if the expected payment does not fall.
Buyer questions to resolve:
- How long does the risk last?
- Will the probable amount move a lot?
- Do you need certainty now or flexibility later?
| Situation | Best fit | Why |
|---|---|---|
| Long-term, uncertain timing | Whole‑of‑life policy | Guaranteed payout whenever death occurs |
| Short window (e.g., 2 years) | Level term insurance policy | Cost-effective cover for fixed period |
| Couple planning for second death | Joint life, second death policy | Pays after both have died; matches second-death liability |
We recommend discussing options with an adviser early. For further guidance, see our practical planning guide.
How much cover do you need to protect business assets from an inheritance tax bill?
A simple calculation can turn a headline valuation into a realistic cash requirement for heirs.
Estimating the potential IHT amount: applying the 40% charge to the taxable value
First, total the estate value. Then subtract the nil‑rate band and any residence allowance that applies.
Apply 40% to the remaining taxable amount to get a baseline IHT figure. This gives a clear target sum.
Worked example mindset: translating an asset value into a likely tax bill
Think in steps: estimate the shareholding value, add other investments and cash, subtract allowances and reliefs.
That taxable amount × 40% shows the likely money needed. Use this to set a deliberate cover amount, not a guess.
Reviewing cover over time as business values, investments and allowances change
Values move. New capital, major sales or a share purchase can change the liability quickly.
We recommend scheduled reviews and these triggers: sale/purchase of shares, refinancing, large valuation uplift, or family changes.
- Keep it affordable: choose cover you can maintain.
- Keep it adequate: update when the estate value or band changes.
| Step | Action | Outcome |
|---|---|---|
| 1 | Calculate estate and allowances | Taxable amount |
| 2 | Apply 40% | Estimated IHT |
| 3 | Match cover to that estimate | Planned cash to meet liability |
Picking the right trust and beneficiaries for your inheritance tax life insurance policy
Who holds control and who benefits are the two decisions that shape any effective trust plan.
Absolute trusts name fixed beneficiaries. Their shares are set. That gives certainty but limits future change.
If a named beneficiary dies before you, their estate may inherit their share. That can be an unwanted result if your family circumstances shift.
Discretionary trusts give trustees flexibility. They can choose from a defined class — for example, children and future grandchildren.
A non-binding letter of wishes helps. It guides trustees without creating legal hurdles. Keep it clear and updated.
Choosing beneficiaries and aligning roles
Decide whether to name specific individuals, a group, or a charity. Think who will actually need the payout to settle any charge.
- Prefer beneficiaries who are likely to meet the bill.
- Avoid putting trustees in distant locations or who are hard to contact.
- Tell your executors where documents live so they can act fast.
Practical tip: align trustees and executors so the payout is used as intended and delays are minimised.
When in doubt, seek professional advice from experienced advisers. Complex families or significant business interests make expert help worth getting.
Buying checklist: costs, health, timing and getting the policy set up correctly
Start by knowing the key costs, medical checks and timing issues that shape any good policy.
When to act
Act early. Younger age and better health usually lower premiums. That makes planning now more affordable than leaving it until later.
Health and underwriting
Insurers review medical history, current conditions, occupation and lifestyle. Be ready to share records, GP notes and medication details.
Disclosure matters. Honest answers speed underwriting and reduce the risk of declined claims later.
Premiums and tax
Payouts are generally tax free for beneficiaries, but a policy not held in trust can form part of the estate and affect tax liability.
Premiums are not tax deductible. Regular premiums paid into a trust may count as gifts from income and can be exempt, subject to your personal circumstances.
When to speak to an adviser
Talk to an adviser if you have substantial company value, complex trusts or mixed beneficiaries.
Bring an asset list, recent valuations, wills, any trust documents and a clear statement of who should benefit. This saves time and helps advisers give precise advice.
- Checklist: decide timing, get health info, set up the trust, name beneficiaries and confirm affordability.
- Review cover after major business events or family changes.
Conclusion
Protecting family choices means turning a potential bill into a predictable, payable sum.
When company value is locked in shares or property, paper worth rarely equals quick cash. A clear cover plan held in trust creates a dedicated pot that keeps the payout outside the estate and speeds access.
Remember the six‑month payment window and that probate can take months. Choose the right policy type, set the correct cover amount and pick trustees and beneficiaries who will act swiftly.
Key benefits include avoiding forced sales, easing pressure on executors and helping preserve the family home. Start by sense‑checking your likely exposure, list holdings and timings, then speak to an adviser. For practical next steps see our advice on inheritance tax planning.