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.
Relevant life insurance can form part of an inheritance tax strategy for limited company directors. When structured correctly, the policy is owned and funded by the company, paid into a discretionary trust, and usually falls outside the insured person’s estate for inheritance tax purposes.
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, looks at the current inheritance tax rules, and outlines the steps involved in setting up cover.
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 allowances have remained frozen for several years. These figures are correct as of February 2026:
- Nil-Rate Band (NRB): The first £325,000 of an estate is free from IHT.
- Residence Nil-Rate Band (RNRB): An additional £175,000 may apply when a main residence is passed 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, potentially providing up to £1 million in combined tax-free allowances.
These thresholds are fixed until at least April 2030. Further details are available on the GOV.UK Inheritance Tax page.
Any standard personal life insurance policy normally counts towards the value of your estate unless it has been written in trust.
For example, a £500,000 life insurance payout could result in a substantial IHT charge if the estate already exceeds the nil-rate band.
This scenario does not normally apply if a relevant life policy is correctly structured under HMRC’s excepted group life rules.
Why relevant life policies can fall outside 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 rather than to your estate.
This means:
- There are no probate delays before the funds can be distributed.
- The payout is normally outside the scope of inheritance tax.
HMRC discusses life policies and inheritance tax in the Inheritance Tax Manual, particularly the sections on life policies (IHTM20000 series).
For excepted group life policies specifically, see IHTM17092 – Excepted group life policies: Inheritance Tax treatment.
The essential role of trusts
The trust is central to the inheritance tax treatment.
Most relevant life policies are written into a discretionary trust, which allows trustees to decide how and when the benefit is distributed.
This structure can also provide protection in certain situations, such as:
- Divorce or creditor claims.
- Care fee assessments in later life.
- Young or vulnerable beneficiaries receiving large sums of money.
Read our guide to trusts and relevant life policies, which explains how these trusts are structured in practice.
Practical steps to implement relevant life for IHT protection
- Review your estate: Add together the value of property, savings, investments, shares and pensions. Use the GOV.UK Inheritance Tax overview to estimate whether IHT may apply.
- Decide on the level of cover: Many directors choose cover in the £250,000–£500,000 range. See how salary and dividends can be used as proof of income, and estimate premiums using our relevant life calculator.
- Choose the policy: Check eligibility first (see who can take out relevant life?) and compare quotes from several insurers.
- Complete the application and trust: The company pays the premiums. Trustees and beneficiaries must be chosen carefully. See our step-by-step setup guide.
- Integrate with other planning: Align the policy with your will and pension nominations. The £3,000 annual IHT gifting allowance can also form part of broader planning.
- Review periodically: If you leave the company or circumstances change, the policy may need to be adjusted. See what happens if you change companies.
Examples
| Scenario | Estate & Cover | Potential IHT Without Planning | With Relevant Life | Related Guide |
|---|---|---|---|---|
| Director aged 48, family home worth £450k | £550k estate, £300k cover | £90,000 IHT on estate above NRB | £300k payout outside estate via trust | Relevant life vs personal insurance |
| Blended family, £800k estate | £400k cover for children from previous marriage | Potential IHT exposure on estate value | Trust distributes benefit directly to beneficiaries | 12 key facts about relevant life |
| Low-profit company director | £200k cover with modest salary | Limited liquidity for estate | IHT-free payout alongside other planning | Low-profit companies guide |
Benefits and limitations
Key benefits
- Premiums are often deductible for corporation tax, reducing the effective cost.
- Payouts are normally outside the estate and free from IHT.
- Funds can reach beneficiaries relatively quickly compared with probate-based assets.
- Can complement other inheritance tax strategies such as pensions or gifting.
Points to be aware of
- Insurers typically limit cover to a multiple of remuneration, often between 10 and 20 times income.
- Large sums inside trusts can trigger periodic or exit charges in some cases.
- The policy is owned by the company, so cover may stop if the company closes or you leave employment.
- Tax treatment depends on current legislation and HMRC rules, which may change.