Inheritance tax (IHT) can significantly reduce the legacy you leave behind. For many families—especially those with property or business assets—the potential tax bill can be well into six or seven figures.

But there’s a straightforward financial planning tool that can help offset that cost: whole of life insurance.

In this guide, we explain how whole of life policies work, how they can be used for IHT planning, and how Willow can help you structure the most efficient solution.

💷 What Is Inheritance Tax?

In the UK, inheritance tax is charged at 40% on the value of an estate above the tax-free thresholds:

Threshold Type and 2025 Values:

• Nil Rate Band (NRB): £325,000
• Residence Nil Rate Band (RNRB): £175,000 (if passing your home to direct descendants)

That means a couple could pass on up to £1 million tax-free if both allowances are used. But anything above that is taxed at 40%—which can add up quickly if you own property, investments, or a business.

🛡️ What Is a Whole of Life Policy?

A whole of life insurance policy provides a guaranteed payout when you die—no matter when that happens (unlike term insurance, which ends after a set period).

When structured properly:

• The payout is tax-free
• It pays out quickly to your beneficiaries
• It can be used to cover the IHT bill directly

💡 Crucially, the policy must be written into trust to avoid becoming part of your estate (and therefore taxed again).

📈 Why Use It for Inheritance Tax?

Whole of life policies are a popular planning tool because they:

• Create liquidity to pay IHT without selling assets
• Lock in premium costs now (while you’re healthy)
• Provide peace of mind for your heirs
• Work alongside other estate planning strategies

They’re particularly useful for:

• High-net-worth individuals
• Families with illiquid estates (e.g. property-rich)
• Business owners
• Clients expecting future IHT liabilities (e.g. inheritance from parents)

🔍 Example Scenario

🏠 Mr & Mrs Davies have a £2.5 million estate, including a £1.2 million home and £800k in investment properties.

After allowances, their IHT liability is approximately £600,000.

Instead of selling property to cover the bill, they take out a joint whole of life second death policy for £600,000, held in trust.

➡️ When the second person dies, the policy pays out directly to their children to cover the tax—preserving the estate.

🤝 Single Life vs. Joint Life Policies

You can structure the policy in one of two ways:

Policy Types Explained:

• Single Life: Pays on death of one person (typically used for individuals).
• Joint Life (First Death): Pays out when the first partner dies.
• Joint Life (Second Death): Pays after both partners have passed—this is the most common structure for inheritance tax planning.

Joint life second death is typically used in estate planning, as IHT usually becomes due only after both spouses die.

🧮 What Does It Cost?

Premiums depend on:

• Age and health
• Smoker status
• Sum assured
• Type of underwriting (guaranteed vs. reviewable)

💡 Many clients over 60 opt for guaranteed premiums, locking in the cost for life. Others use gifted funds or family wealth to pay the premiums via trust contributions.

📝 Trusts and Estate Planning

Writing the policy into trust ensures:

• The proceeds don’t form part of your estate
• There’s no delay in probate
• The funds go straight to your chosen beneficiaries or executors

At Willow, we guide clients through the process with your solicitor or adviser to ensure the correct trust structure is in place.

👨‍👩‍👧‍👦 Coordinating with Family and Advisors

IHT planning isn’t just about numbers—it’s also about conversations.

We recommend:

• Involving your children or executors early
• Aligning the policy with your will and other planning tools
• Reviewing the policy regularly (especially if your estate grows)

⚖️ Are There Alternatives?

Yes—clients may also consider:

• Lifetime gifting
• Business relief (e.g. AIM shares)
• Property ownership restructuring
• Charitable donations

But these often require giving up control or liquidity. A whole of life policy is one of the few tools that preserves your estate while covering your liability.

💬 Is It Right for You?

Whole of life isn’t the right solution for everyone. But if you:

• Have an IHT liability
• Want to avoid selling assets
• Prefer fixed, predictable planning
• Value peace of mind for your family

... then it’s a strategy worth exploring.

📞 Want Help Navigating Today’s Market?

Book a free strategy call with one of our mortgage and protection specialists.

We’ll help you find the smartest way forward—whatever your legacy goals.