Is life insurance taxable in a trust? It can be, depending on the kind of trust. A payout from a policy in trust is not usually counted in the estate of the person who set the trust up, but a discretionary trust can face inheritance tax charges of its own, and income tax can apply to a gain on the policy or to interest on money the trustees hold.
Still choosing a policy? An FCA-authorised broker phones at no charge to go through the trust wordings their insurers use, once your details arrive through the form on this page. What follows is the general position HMRC and insurers set out, as at October 2026; it is not tax advice, and the rules can change.
Where does inheritance tax fall once the policy is in trust?
Aviva's Guide to trusts (EDCO0853 0126) says that once a policy is written in trust it is no longer part of the settlor's estate, and the trustees claim and receive the benefits directly. Its inheritance tax point carries a condition: the benefits are outside the estate "(as long as neither the settlor nor his estate or personal representatives are a beneficiary)". Check for that condition in any trust you are offered.
HMRC's Inheritance Tax Manual (IHTM20012) says settled policies are normally treated like any other trust property, so the trust rules below apply to them. Its page on life policies in trust (IHTM20141) adds that any claim to tax depends on how the trust documents are worded, so the label on the form is not enough.
Policies outside a trust are dealt with in tax on a life insurance payout in the UK, using cover to meet a future bill in life insurance for inheritance tax, and the case for having a trust at all in whether you need a trust.
Does the trust itself pay inheritance tax? Periodic and exit charges
It can, if it is a relevant property trust. GOV.UK's Trusts and Inheritance Tax guidance (last updated 6 April 2025) says "Most property held in trusts counts as relevant property", and HMRC's manual says all property settled on discretionary trusts is relevant property unless it is held on a special trust. Legal & General's customer page on protection trusts puts its Discretionary, Survivors Discretionary and Flexible trusts in that group and says absolute trusts are treated as a potentially exempt transfer.
Relevant property carries two charges, both described in the GOV.UK guidance:
- The periodic (ten-year) charge. Trustees pay it on every 10 year anniversary of the date the trust was set up if the relevant property is worth more than the Inheritance Tax threshold, given as £325,000. It is charged on the net value on the day before the anniversary, and HMRC's manual puts the rate at up to 6%.
- The exit (proportionate) charge. It applies when, for example, the trust ends or some assets are distributed to beneficiaries, at a maximum of 6%. HMRC's manual measures it by how much the relevant property falls in value because of the event. There is no exit charge for an asset leaving within 3 months of the trust being set up, or within 3 months after a 10 year anniversary.
When does a life policy in trust have a value for those charges?
Both charges are worked out on value, so the question is what the policy is worth at the time. HMRC's manual on life policies (IHTM20083) says a term assurance policy "will never have a surrender value, although it may have a market value", and that the Actuarial Team values life policies on an open market basis. For its bare trust, Aviva says the gifted benefits "will normally only have value when/if the policy pays out in the event of a claim".
Legal & General's Discretionary Trust Guide (W12709, August 2026; held in its adviser file area and linked from its customer trusts page) says that before a claim the relevant property is valued on the policy, "and as long as the life insured is in good health, the value of the policy for inheritance tax is likely to be negligible".
| Stage | What the sources say |
|---|---|
| Before a claim | L&G says a periodic charge is based on the policy's value, likely to be negligible for someone in good health. |
| After a claim, money still in the trust | L&G says a periodic charge "may become payable" because the proceeds are then in the trust. Aviva says some tax may be payable if the money stays past the tenth anniversary. |
| Trustees pay beneficiaries | An exit charge may arise, at a maximum of 6%, which L&G says applies only to value above the nil rate band available to the trust. L&G says it usually only happens if a charge was paid at the last anniversary or the start of the trust. In its example, with the settlor dying 8 years in, none applies if the money is paid out before the next anniversary. |
None of this gives the bill for a given trust, and L&G's guide refers readers to an adviser or tax professional. For cover you are still comparing, the broker who phones after your form arrives can talk through how a trust would sit with it.
Does a life insurance trust pay income tax or capital gains tax?
A gain on the policy. HMRC's Self Assessment helpsheet HS320 (2026) lists, among the occasions when a chargeable event gain can arise, that "a policy matured or was brought to an end by the death of the life insured". It adds that qualifying policies generally do not give rise to chargeable event gains, and that a gain on death is worked out from the surrender value immediately before death, not the death payout; the insurer can give that value and confirm whether the policy qualifies. If a gain arises, HMRC's Insurance Policyholder Taxation Manual (IPTM3250) charges the beneficiary of a bare trust and, in the common case of other trusts, the settlor. The Trusts, Settlements and Estates Manual (TSEM3210) attributes a gain caused by the settlor's own death to the settlor; trustees are chargeable in listed cases, such as where the trust's creator was already dead at the time of the event, though HS320 treats a gain in the tax year of that death as that person's income.
Interest or income on the money. If trustees hold the proceeds for a time, GOV.UK says most trusts pay no Income Tax on income up to a tax-free amount (normally £500). Above that amount, GOV.UK says tax is due on the full income, not just the excess; trustees of a discretionary trust are responsible for it, at 45% on most income and 39.35% on dividend-type income. In a bare trust the beneficiary is responsible.
Capital gains tax. HMRC's Capital Gains Manual (CG69040) says the legislation on life policies aims to "exclude most life insurance policies from Capital Gains Tax", and CG69042 says a gain on disposing of the rights under a policy is not chargeable unless the policy is a second-hand one, bought from someone else.
Does the kind of trust change the tax?
Yes. The table collects what the sources above say; which type suits a family is for a solicitor or tax adviser.
| Type of trust | Inheritance tax on the trust | Gain on the policy |
|---|---|---|
| Bare (absolute) | L&G treats it as a potentially exempt transfer; GOV.UK says a transfer into a bare trust may be exempt if the person making it survives for 7 years. | The beneficiary is chargeable. |
| Discretionary, including flexible and survivor's | Relevant property: periodic and exit charges as above. | The settlor is generally chargeable, with the exceptions above. |
| Interest in possession | GOV.UK says for assets transferred on or after 22 March 2006 the 10-yearly charge may be due. | The settlor is generally chargeable. |
What each type involves, and what can be changed later, is in life insurance trust options, and the wider topic in the trusts and tax guides.
Should a trust or a person be named as the beneficiary?
The sources set out what differs and leave the choice with you. With a trust, Aviva says the trustees claim and the money goes to them directly. Without one, it says death benefits go to the estate when the settlor dies within the term, and a grant of probate or letters of administration is needed before the insurer can pay. The tax follows the trust's wording, as above.
The steps for an existing policy are in putting a life insurance policy in trust. HMRC's manual notes that where a person transfers a policy to another, its value at the date of transfer may be taxable as a gift. Deciding before you buy? Put the question to the broker when they ring; it costs nothing.
Frequently asked questions
What if the person who set up the trust dies within seven years?
L&G's guide says a liability could arise if the settlor dies within seven years of making a chargeable transfer into the trust, at a death rate of up to 40%, with any entry charges already paid deducted. GOV.UK says that if you die within 7 years of a transfer into a trust, your estate will have to pay Inheritance Tax at the full amount of 40% instead of the 20% payable in life. Where exemptions cover the premiums, or the transfer of an existing policy, L&G says there should be no charge on the settlor's death for those exempt transfers.
Is there a charge for putting an existing policy into a discretionary trust?
There can be. L&G's guide says an entry charge may apply, though a policy with no surrender value, put in while the life insured is in good health, likely has a negligible open market value and a nil entry charge. For lifetime gifts of a policy, HMRC's manual (IHTM20241) sets a minimum value of, broadly, premiums paid less sums received, used only if it exceeds open market value and subject to exclusions; L&G says whole of life policies are unlikely to have a negligible value. How premiums use the gift allowances is covered in life insurance for inheritance tax.
Does a joint policy in trust work differently for inheritance tax?
Aviva says both owners must agree and both become settlors, and that if the Survivorship Option is selected the benefits on the first death form part of the survivor's estate, so the trust may not give effective inheritance tax mitigation on their death. More is in joint life insurance in trust.
Is anything reported to HMRC when the policy pays out?
HMRC's Trust Registration Service manual (TRSM23030) says a trust excluded from registration while the policy ran stays excluded for two years after the death, and must register if the funds have not been distributed by then; see registering a life insurance trust. If an inheritance tax charge falls due, GOV.UK says you pay using form IHT100.
Sources
- Aviva, Guide to trusts (EDCO0853 0126), read 26 October 2026. protection.aviva.com/globalassets/life/documents/0853_guide_to_trusts.pdf
- Legal & General, Discretionary Trust Technical Guide (W12709 08/26), read 26 October 2026. legalandgeneral.com/asset/4a8b81/.../w12709.pdf
- Legal & General, Protection trusts, read 26 October 2026. legalandgeneral.com/existing-customers/personal-protection-trusts-tool
- HM Revenue & Customs, Trusts and Inheritance Tax (last updated 6 April 2025), read 26 October 2026. gov.uk/guidance/trusts-and-inheritance-tax
- GOV.UK, Trusts and taxes (Inheritance Tax, Income Tax and Capital Gains Tax pages), read 26 October 2026. gov.uk/trusts-taxes
- HM Revenue & Customs, HS320 Gains on UK life insurance policies (2026), read 26 October 2026. gov.uk/government/publications/gains-on-uk-life-insurance-policies-hs320-self-assessment-helpsheet
- HM Revenue & Customs manuals, read 26 October 2026: Inheritance Tax Manual IHTM20012, IHTM20141, IHTM20083, IHTM20241, IHTM42081, IHTM42111 and IHTM42161; Insurance Policyholder Taxation Manual IPTM3250; Trusts, Settlements and Estates Manual TSEM3210; Capital Gains Manual CG69040 and CG69042; Trust Registration Service Manual TRSM23030.