Putting life insurance in trust: how it works and the tax rules
Writing your policy in trust can keep the payout out of your estate, away from inheritance tax, and get it to your family faster. Here is how a trust works, the tax rules, and how to set one up.
Get my quoteWhy a trust matters
By default, a life insurance payout is paid into your estate, where it can be delayed by probate and, if your estate is large enough, taxed at 40%. Writing the policy in trust changes that.
A trust means the policy is held for named people, so the payout goes straight to them. It normally sits outside your estate for inheritance tax, reaches your family faster, and is usually free to arrange.
What putting a policy in trust means
A trust is a legal arrangement where you, the settlor, place your policy in the care of trustees, who hold it for the people you choose, the beneficiaries. The policy still works exactly as before, and you carry on paying the premiums. What changes is where the money goes when it pays out. Instead of landing in your estate, it passes to your trustees, who give it to your beneficiaries. It is often called writing a policy in trust, and most insurers offer it at no cost.
Why put life insurance in trust?
There are three main reasons people do it, and they often apply together.
With and without a trust
Where the payout goes, and what it passes through
- It avoids inheritance tax on the payout. Held in trust, the lump sum normally sits outside your estate, so it is not taxed as part of it.
- It avoids probate delays. The money can reach your family in weeks rather than waiting months for the estate to be settled.
- It gives you control. You decide who benefits and, with some trusts, the trustees can manage when and how.
The tax rules
Inheritance tax is charged at 40% on the part of an estate above the tax free threshold. Everyone has a nil rate band of £325,000, and a further residence nil rate band of £175,000 can apply if you leave your main home to direct descendants. Both are frozen until at least April 2030. A married couple or civil partners can often pass on up to £1 million tax free by combining their allowances.1 Around 4% of estates currently pay the tax, though the frozen thresholds are pulling in more each year.2
A life insurance payout that is not in trust is added to your estate, so it can be the very thing that pushes you over the threshold and into a 40% charge. In trust, that payout is normally outside your estate altogether.
What a £200,000 payout could leave
If the payout falls in the taxable part of an estate
Assumes the payout falls within the taxable part of an estate, the worst case. Illustrative.
The example above assumes the payout falls entirely within the taxable part of an estate, which is the worst case. A few finer points are worth knowing. The premiums you pay into a trust policy count as gifts, but they are usually covered by everyday exemptions, such as the annual gift allowance or gifts made from regular income, so they rarely cause an issue.4 The payout itself is free of income tax and capital gains tax whether or not it is in trust. Very large sums held in a discretionary trust can face their own periodic charges, so it is worth taking advice if your cover is substantial. From April 2027, unused pension pots will also start to count towards estates for inheritance tax, which is making protection and trusts more relevant for many families.4
Types of trust
Insurers usually offer a small number of standard trusts, and the right one depends on how much flexibility you want.
| Type | How it works | Good for |
|---|---|---|
| Bare or absolute | The beneficiaries are fixed at the start and cannot be changed later. | Certainty about exactly who benefits, such as a named partner. |
| Discretionary | Trustees decide how and when to pay from a chosen group of potential beneficiaries. | Flexibility, for example if your family circumstances may change. |
| Flexible | A named main beneficiary, with the option to include others. | A balance of certainty and flexibility. |
How to set it up
- Use the insurer’s trust form. Most offer one free, either when you apply or at any time afterwards.
- Choose the type of trust. Bare, discretionary or flexible, depending on the control you want.
- Appoint your trustees. You can be one, but choose at least one other person you trust to act for your beneficiaries.
- Name your beneficiaries. The people you want the payout to go to.
- Sign and store it. Keep it safe and tell your trustees where to find it.
- Get advice if it is complex. For larger estates or unusual circumstances, a solicitor or adviser can help.
Things to weigh
- It is hard to undo. Placing a policy in trust usually cannot be reversed, so you give up some control.
- Choose trustees carefully. Pick people who will act in your beneficiaries’ interests, and name more than one.
- Joint and existing policies. These can be more complex to place in trust, so check before you assume it is simple.
- Large sums need advice. Substantial cover in a discretionary trust can bring its own tax charges.
- It is about destination, not payout. A trust changes where the money goes and how it is taxed, not whether the policy pays.
“Writing a policy in trust is one of the easiest wins in protection. It is usually free, it takes a single form, and it can save your family a 40% tax hit and months of probate. The main thing people miss is simply doing it, the form sits in a drawer unsigned. If your estate is anywhere near the threshold, or you just want the money to reach the right people quickly, it is well worth setting up, and worth advice if your affairs are complex.”
Frequently asked questions
Should I put my life insurance in trust?
For many people it makes sense, especially if your estate may exceed the £325,000 threshold or you want the payout to reach your family quickly and go to the right people. It is usually free. It is not right for everyone, so take advice if your situation is complex.1
Does it actually avoid inheritance tax?
It normally keeps the payout outside your estate, so the lump sum itself is not taxed as part of it. It does not reduce inheritance tax on the rest of your estate, and the rules depend on your circumstances.1
Is it free to put a policy in trust?
Usually yes. Most insurers provide a standard trust form at no cost. A solicitor may charge if you need a tailored or more complex trust.3
Can I change it after setting it up?
It depends on the trust. A discretionary trust gives trustees flexibility over who benefits, while a bare trust fixes the beneficiaries. Putting a policy in trust is generally hard to reverse, so choose carefully.
Do I need a solicitor?
Not usually for a standard insurer trust form, which is designed to be straightforward. A solicitor or financial adviser is sensible for larger estates, joint policies, or unusual family arrangements.
Does Surely set up or advise on trusts?
Surely is a comparison service that helps you compare life insurance and get quotes online. Setting up a trust is a legal and tax matter, so you would use your insurer’s free trust form or a solicitor.
For impartial money guidance you can use MoneyHelper, the government backed service.
This guide is general information about how trusts and inheritance tax work, not legal or tax advice. Tax rules, thresholds and reliefs can change, and the right approach depends entirely on your circumstances. For larger or complex estates, joint policies or anything you are unsure about, consider a solicitor or a qualified financial adviser.
How We Researched This Guide
We write our guides from named, public UK sources and cross check the figures. This guide drew on:
- HMRC and GOV.UK inheritance tax rules for 2026/27, for the thresholds, the 40% rate and the freeze to April 2030.
- HMRC and Office for National Statistics data, for the share of estates that pay inheritance tax.
- GOV.UK guidance on trusts and on life insurance, for how writing a policy in trust affects the estate.
- Insurer trust documentation, typically provided free, for the cost and the setup process.
Written and reviewed by Paul Gillooly, Founder of Surely. Last reviewed June 2026.
Sources
- HMRC and GOV.UK, inheritance tax (and passing on a home), 2026/27: nil rate band £325,000 per person, residence nil rate band £175,000 where a main home passes to direct descendants, 40% on the excess (36% if 10% or more of the estate is left to charity), both bands frozen until at least April 2030; a married couple can pass on up to £1 million tax free.
- HMRC and Office for National Statistics: around 4% of UK estates pay inheritance tax, a share rising as the thresholds remain frozen.
- Surely, based on UK insurer trust forms, which are typically provided free of charge.
- GOV.UK guidance on trusts and taxes and gifts, including premium gift exemptions and the change from April 2027 bringing unused pensions into estates for inheritance tax.
Surely is a trading style of PJG Financial Ltd, authorised and regulated by the Financial Conduct Authority, firm reference number 919697. This page is a financial promotion and is for general information. Life insurance has no cash in value at any time and cover ends if you stop paying premiums. Tax treatment depends on your individual circumstances and may change in the future.
