Relevant Life and Inheritance Tax Planning
As a company director of a limited company, you already know how important it is to protect your family’s finances. But many directors overlook how life cover can trigger a large inheritance tax (IHT) bill.
One practical solution is to take out a relevant life insurance policy.
- The policy is owned by your limited company.
- The premiums are usually tax-deductible as a business expense (see is relevant life a business expense?).
- If the policy pays out, the funds are distributed directly to your chosen beneficiaries through a trust.
- If set up correctly, the policy falls completely outside your estate for IHT purposes.
This guide explains how relevant life fits into IHT planning, provides step-by-step setup advice, covers common scenarios, outlines the benefits and limitations, and outlines next steps.
For the fundamentals, start with our guide to the tax benefits of relevant life.
Current UK Inheritance Tax Rules
Inheritance tax is charged at 40% on the value of an estate above certain thresholds.
The rates have remained frozen for many years. These rates are correct as of February 2026:
- Nil-Rate Band (NRB): The first £325,000 is free from IHT.
- Residence Nil-Rate Band (RNRB): An additional £175,000 is added where the family home is left to children or grandchildren, including adopted and step-children. This can increase the tax-free threshold to £500,000 per individual.
- Couples: Unused allowances can be transferred to a surviving spouse or civil partner. This can provide up to £1 million in combined tax-free allowances.
These thresholds are fixed until at least April 2030. Find out more on the GOV.UK Inheritance Tax page.
Any standard personal life insurance you take out counts towards the value of your estate if it has not been written in trust.
For example, a £500,000 payout could result in £70,000+ in IHT if the value of your estate is already over the NRB threshold.
This scenario does not apply if your relevant life policy is correctly structured under HMRC’s excepted group life rules.
Why do relevant life policies fall outside the scope of IHT?
Relevant life policies are treated as excepted group life policies under HMRC rules.
Your limited company owns the policy and pays the premiums, which are usually deductible as a business expense for corporation tax purposes.
On death, the lump-sum benefit is paid to a trust, not your estate.
This means:
- There are no probate-related delays, so the funds reach beneficiaries faster.
- There is no IHT on the payout.
You can read HMRC’s guidance on life policies and inheritance tax in their Inheritance Tax Manual, particularly the sections on life policies (IHTM20000 series).
For pensions and excepted group life policies, see IHTM17092 – Excepted group life policies: Inheritance Tax treatment.
The essential role played by trusts
The existence of a trust is what provides protection from IHT.
Most relevant life policies use a discretionary trust, in which trustees decide how and when to distribute the funds.
This provides protection against:
- Divorce claims or issues with creditors.
- Future care home fees (in some cases).
- Young or vulnerable beneficiaries from spending unwisely.
Read our guide to trusts and relevant life policies, which explains the practical side of trusts.
Practical Steps to Implement Relevant Life for IHT Protection
- Review Your Estate: Add up the total value of your property, savings, investments, shares, and pensions. Use the GOV.UK Inheritance Tax overview to check if IHT is likely to be payable on your estate.
- Decide Cover Amount: Many directors aim for £250,000–£500,000 (see how salary and dividends can be used as proof of income). Model costs and IHT savings with our relevant life calculator.
- Choose the Right Policy: Check eligibility first (who can take out relevant life?). Get quotes for several major insurers.
- Complete Application and Trust: Your company pays the premiums. Carefully choose trustees and beneficiaries. See our step-by-step setup guide.
- Integrate with Other Plans: Keep it aligned with your will and pension nominations, and factor in the £3,000 annual IHT-free gifting allowance. Check it each year, or when something significant changes.
- Monitor Changes: If you leave the company, your policy may be portable. See what happens if you change companies.
Some examples
| Scenario | Estate & Cover | Potential IHT Without Planning | With Relevant Life | Related Guide |
|---|---|---|---|---|
| Director aged 48, family home worth £450k | £550k total estate, £300k cover needed | £90,000 IHT on £225k excess (after £325k NRB) | £300k payout IHT-free via trust | Relevant life vs personal insurance |
| Blended family, £800k estate | £400k cover for children from previous marriage | £190,000 IHT possible | Direct to kids via trust, avoids step-family complications | 12 key facts about relevant life |
| Low-profit company director | £200k cover despite modest salary | Still deductible; provides liquidity | IHT-free protection pairs with business continuity | Low-profit companies guide |
Benefits and Important Limitations
Key Benefits
- Premiums usually include a corporation tax reduction, so the net cost is often 20–50% lower than personal cover.
- Payouts are usually fast (typically 4–8 weeks) and free from IHT.
- Depending on the insurer, you can add additional protection (see including critical illness cover).
- Complements other IHT strategies, such as pensions or gifting.
Points to be aware of
- Insurers normally limit cover to a multiple of remuneration. Depending on your age and circumstances, this is often somewhere between 10 and 20 times your income.
- If the value inside the trust becomes very large, periodic or exit charges can arise.
- The policy is owned by the company. If you close the company or move on, the cover will usually stop, although some insurers offer conversion options.
- Tax treatment is based on current legislation and HMRC rules, which can change. It should be reviewed periodically.