Life insurance is a well established market and yet under-appreciated as a means of settling tax on inheritance. For wealthy foreigners facing steep bills in the UK, and where traditional trust approaches have been shut down, the need to examine insurance is increasingly urgent, practitioners say.

After the UK government scrapped the UK resident non-dom system and, in particular, turned the screws up on how inheritance is taxed, it prompted private client advisors to ask what tools could be used to moderate the pain.

While traditional structures such as trusts appear less robust for IHT purposes, options remain, such as forms of life insurance. However, advocates of this argue that advisors aren’t sufficiently attuned to insurance particularly for overseas investors. 

“A problem is that many wealth managers, lawyers and other parties have little idea about the uses for insurance in this area,” Tim Searle, a veteran advisor to HNW individuals, told this publication. Searle, who has been working offshore for three decades, is based in Dubai.   

At the core of the idea is that if a policy can pay out money to cover a tax bill, paying to set this policy up will be far less expensive overall than the alternative of having to meet this eventual liability, borrow money to pay the bill if possible, or break up a farm, sell assets or other businesses. All assets pass to the control of HMRC on death, and probate can only be settled when all dues are met. 

The use of insurance in the UK to handle such matters remains low-key, contrasting with insurance often being a cornerstone, even dominant, route in markets such as Greater China, and in the US, for example. 

Searle is not alone in seeing growth potential. Life insurers should benefit from the IHT changes made by UK Chancellor of the Exchequer Rachel Reeves last year, Liz Palmer, head of private wealth, at London-based law firm Howard Kennedy, told this publication. 

“Life insurance will be a problem-solver for a lot of people,” she said. “For non-doms who have decided to leave the UK and sell all UK assets, there is a 'tail’ that means they will stay within the scope of IHT for much longer and insuring this risk could be an attractive solution,” she said. 

Another idea that HNW families might explore, Palmer said, are family investment companies, which were not affected by the 2024 budget. They come with certain tax exemptions. However, if the concept were to become more popular there is a risk that it could encourage HMRC to examine them more closely.

So how does the insurance route work?
Searle explains that an insurance policy could be structured so that, for example, if a person gifts an estate to an heir, the policy would cover the seven-year transfer period, which still has an exposure to IHT. These are sometimes referred to as inter-vivos policies but many investors do not wish to gift due to the lack of control of the asset(s). Conversely, a whole of life policy could cover the IHT liability; the value of the amount being insured is set at the outset, and will grow over time since in reality the property’s value will rise over the decades. Policies have to be dynamic since the liability grows as the asset(s) increase, he said. 

Another important feature for offshore policies is that a policy can be surrendered and money refunded about 15 years after a policy is initiated if it is no longer needed to cover this IHT liability, Searle said. 

Searle said he works with a client’s advisor to establish a policy for a client in a trust for their beneficiaries, as this means that the proceeds will remain outside the estate. This money can then be used to pay some, or all, of the IHT due by HMRC.

A different environment
It may be that in the past advisors have found it more lucrative to promote other ways to mitigate IHT, and the trusts sector has been a part of that. But with the harsh realities of Reeves’ changes taking effect, the hunt for alternatives is bound to become more intense.

Reeves has frozen the nil-rate band IHT threshold of £325,000 ($400,000) until 2030; inherited pensions will be brought into inheritance tax from 2027.

Agricultural Relief and Business Property Relief have also been changed, meaning that from April 2026, the first £1 million of qualifying combined assets will have no inheritance tax at all, but for assets over £1 million a 50 per cent relief will apply, at an effective rate of 20 per cent. Qualifying shares on the Alternative Investment Market (AIM) will no longer have full exemption from IHT, instead from 2026 they will have an inheritance tax rate of 20 per cent if they are held for two years. 

Changes since 2017
UK legislation, retroactive to 2017, states that all foreign owners of residential property are liable to up to 40 per cent inheritance tax, regardless of what structures (such as special purpose vehicles and trusts) they have set up or where they are domiciled. Those changes brought most UK property assets under the scope of IHT regardless of what sort of trust structure, offshore company, nationality, domicile, residence or passport was employed.

Before 2017, the most effective method for foreigners to purchase residential property in the UK was by an offshore company and trust which managed not only IHT but capital gains tax too. Jurisdictions such as the British Virgin Islands, Jersey and Guernsey profited from it. However, Searle said, that approach no longer works. 

“It is crucial for UK advisory to appreciate that international insurance options exist to give foreign investors the comfort of retaining control of the asset and ensuring liquidity is immediately available for when this eventuality occurs,” Searle said. “There are few options open to foreign investors in the UK not only because of their overseas status but there are better options open to them internationally. UK advisory need to expand their ubiquitous domestic advice if they are to serve overseas clients accurately taking into consideration all the options open to them.” 

A view from Geneva
Cécile Civiale Vuillier, TEP, partner at Trustconsult (Suisse), in Geneva, explained how the landscape has changed and the value insurance brings. 

“As a responsible trustee firm, we've proactively engaged with all clients affected by these changes to review their UK property holding structures. This review process considers both the revised tax implications and the broader needs of each family. Many families continue to value trusts for legitimate reasons beyond tax efficiency – particularly for maintaining privacy between heirs and ensuring professional asset management across generations,” she said. “It's important to acknowledge that maintaining trust structures does involve costs, including the fees now levied by HMRC. However, when approached holistically, trusts still offer significant value when integrated with complementary planning tools.

“Insurance solutions work particularly effectively alongside trusts in this new environment. When structured properly, insurance provides trustees with immediate liquidity upon the passing of the ultimate beneficial owner – enabling them to settle IHT liabilities promptly, clear estate debts, and distribute legacy assets to beneficiaries while the broader estate progresses through probate,” she said. 

“This combined approach allows trustees to fulfil their core mission: protecting assets for future generations while navigating tax obligations efficiently. While trusts can no longer 'shield' UK residential property from IHT, they remain essential components in comprehensive estate planning when deployed strategically with other solutions like properly structured insurance,” Vuillier added. 

Costs
Howard Kennedy’s Palmer said that for some people the cost of keeping the trust will be a trade-off between a 6 per cent IHT charge on the value of the trust every 10 years and the asset protection risks of putting the assets into the hands of beneficiaries who might not cope with the wealth. This might be preferable if bringing the trust to an end.

Searle argues that insurance is a far cheaper option than using a trust in this case, however. 

“De-envelope the trust, keep it in the client name, retain full control, deploy an insurance contract to meet the IHT, and then pass to heirs as per your wishes on death,” he said. 

Changing tack away from IHT mitigation, this news service asked Palmer what else she sees people doing in the hope of reducing general tax burdens.

With certain HNW individuals who already have a connection to another country, they may consider moving, she said. “They need to ask 'could I live here on a full-time basis?’” she said. 

However, the allure of abroad brings risks, Palmer added.