If you’ve been following the headlines, you may know that unused pension funds and death benefits payable from pensions could, from April 2027, form part of your estate for Inheritance Tax (IHT) purposes. 

According to Fidelity, this change could bring an estimated 10,500 estates into the scope of IHT for the first time.

With this in mind, you may be thinking about ways to help your loved ones manage a potential IHT bill after you pass away. 

Gifting can be an effective method of reducing the value of your estate, but in many cases, an IHT bill may still be unavoidable. 

Read more: Everything you need to know about gifts and Inheritance Tax

Instead of focusing solely on reducing your taxable estate, you could take steps to ensure your beneficiaries have the funds needed to pay an IHT bill when the time comes. 

One approach you may not have considered is writing whole-of-life cover into a trust. 

Continue reading to find out how this works and whether it could make a difference to your loved ones’ future financial security.

Inheritance Tax means your loved ones could pay a charge on your estate when you pass away

IHT is essentially a charge on the portion of your estate that exceeds certain thresholds. Your estate includes your property, savings, investments, and, from April 2027, potentially your pension. 

The standard rate of IHT is 40%. However, your loved ones can benefit from certain tax-free allowances before they pay IHT.

For 2025/26, the “nil-rate band” allows you to pass on £325,000 without paying IHT. This has been frozen until at least 2030. 

If you leave your main home to a direct lineal descendant, such as a child or grandchild, the “residence nil-rate band” adds £175,000 to your total allowance. 

If you’re married or in a civil partnership, you can typically pass your entire estate to your partner without IHT. Your surviving partner can then inherit any unused nil-rate bands, effectively doubling the total threshold to £1 million.

While this might sound generous, rising property values and growing pension funds could mean more of your wealth will be subject to IHT. This is why it’s so important to plan ahead. 

Whole-of-life cover in a trust could allow your family to pay for an Inheritance Tax bill

Whole-of-life cover is designed to pay a lump sum to your beneficiaries when you pass away, so long as you keep up with the monthly premiums. 

Unlike term insurance, the cover typically doesn’t expire after a set period of time.

If your estate is likely to exceed the aforementioned IHT thresholds, a whole-of-life policy could provide your loved ones with the funds they need to cover a tax bill. 

The payout could also help them maintain their standard of living at a time when they may be facing emotional strain as well as large expenses, such as a funeral. 

However, it’s vital to remember that you should write the policy into a trust to ensure it doesn’t inadvertently increase the value of your estate.

A trust is a legal arrangement that allows you to appoint trustees to hold and manage the policy on behalf of your beneficiaries. 

When the policy is placed in a trust, it typically falls outside your estate for IHT purposes, meaning the payout is usually exempt from tax.

If the policy isn’t placed in a trust, it could serve to increase the value of your estate after you pass away, resulting in an even larger IHT bill for your loved ones.

Moreover, since the policy sits within a trust, the payout can usually bypass probate, the legal process of dealing with your estate. 

Read more: The probate process explained: Why it matters to you and your loved ones

This allows your loved ones to access the funds quickly, helping them settle any tax liability and maintain their financial stability without using their own savings.

Trusts also provide greater control over who receives the money, and when. This could be especially useful if you aren’t married or wish to ensure the funds are used in a certain way. 

For instance, you might want your beneficiaries to only access the money after they’ve completed higher education, or when purchasing their first home.

Trusts tend to be complex, so it’s worth working with a financial planner

While writing whole-of-life cover into a trust has its benefits, it’s essential to note this can be complex to set up and manage. 

Indeed, the legal and tax implications can be challenging to wrap your head around, and the structure of the trust needs to align with your estate planning goals. 

As such, it’s often prudent to work closely with a financial planner.

We could assess the IHT exposure of your estate and help you determine the right levels of cover for your unique situation.

At Optimum Path, we’ll also take the time to understand your family circumstances, ensuring any arrangements reflect your wishes.

Be sure to contact us now to find out how our Chartered financial planners can help. 

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

The Financial Conduct Authority does not regulate estate planning, tax planning, or trusts.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

Note that life insurance and financial protection plans typically have no cash in value at any time, and cover will cease at the end of the term. If premiums stop, then cover will lapse.

Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.