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Older Brits resort to getting into debt or taking out expensive life insurance to beat Reeves’ IHT hike

Journalist: Samantha Downes (Soames), News reporter - freelance - national newspapers and trades

ended 17. August 2025

FINANCIAL advisers have shared the drastic measures savers are going to to make sure their families do not get lumbered with a huge inheritance tax bill, as the Labour government is reported to be contemplating capping the amount of tax-free cash families can pass down during their lifetime.

The current gifting limit is £3,000 a year but often older family members will drip feed this amount for decades before passing away. 

Larger sums can be given away but are subject to a seven year ‘sliding scale’ rule, which means some of it may fall within the 40% IHT tax band.

Samuel Mather-Holgate, an independent financial adviser at Swindon-based Mather and Murray Financial said that the biggest strategy adopted by Brits wanting to avoid IHT was gifting wealth away, but he was seeing more Brits using equity release, effectively getting into debt to make sure family members did not miss out on cash.

“We have seen more and more people opting to dish out their wealth during their lifetime, even using equity release to bump up the pay outs."

Rob Mansfield, independent financial adviser at Rootes Wealth Management, said he was recommending trusts to his clients. 

Trusts are legal entities that ringfence large amounts of money or assets - although the family member who sets up the trust often has to hand over ownership of the asset or cash where it will sit until they die.

Ross Lacey, director and independent financial adviser at Rayleigh-based Fairview Financial Management said many Brits were unaware of IHT with some overestimating how much they may owe.

“Many think they're impacted when they aren't and others are blissfully unaware of the magnitude of the tax their family will pay.”

Scott Gallacher, director at Leicester-based Rowley Turton said life insurance was being used by some Brits, mainly farmers who had static assets to pass down to younger members.

Philip Dragoumis, director and owner at London-based Thera Wealth Management said: "We are saying more and more clients are looking at whole of life insurance mainly because pensions will be subject to IHT after April 2027. 

“However life cover can be expensive and importantly can only offset the tax on death.”

Dragoumis explained that gifting was the cheapest and easiet option but if Rachel Reeves does introduce a cap or a lifetime tax he said: “I expect I will recommend whole of life much more."

 What is equity release and how is it used for IHT?

Equity release allows you to re-borrow using the value of your home. So someone wanting to gift money can cash in on the value of their home and ‘take out equity’. 

However they, or their relatives, will need to pay back the loan, with interest at some point down the line.

It could mean having to sell the home depending on what type of equity release is taken out. Equity release is a specialist product and the government advises people considering it to seek the advice of a specialist mortgage adviser

What is life insurance for IHT?

Life insurance policies can be written to cover an IHT bill. You will need to have an idea how much your IHT bill will be and it can be a whole life single life, or joint life second death policy.

You will need to have it written in trust which will ringfence the money from your estate, as that means it is not subject to inheritance tax.

Monthly premiums are when you are alive and, when you die, the trustees, your beneficiaries, can use the proceeds to settle the IHT bill promptly.

Families can take out Gift Inter vivos insurance which is a seven-year term insurance taken out by wealthy individuals who feel they may not live another seven years and want to use the 7-year rule to give their children or grandchildren cash.

This type of life insurance gets cheaper, and if the person has not died at the end of the seven years, then no IHT is due anyway.

This type of insurance is also written using trust law, so the money paid out will have to be paid into a tax-free or tax-friendly trust. If it is paid into the estate it then becomes taxable so subject to inheritance tax.

5 responses from the Newspage community

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Rob Mansfield
Independent Financial Advisor at Rootes Wealth Management
Life insurance can be a useful way of dealing with inheritance tax but I don't know how many people are aware of it. I'm increasingly raising this as an option with clients. It's really important to consider using a trust, as if the money comes into the deceased's estate, there is then inheritance tax to pay on the payout, which means more for the taxman. It doesn't stop there being an IHT bill but it provides a way of it being paid.
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Ross Lacey
Director & Independent Financial Adviser at Fairview Financial Management
We're definitely seeing an increase in enquiries around planning for and mitigating inheritance tax. It's become ever more of a pain point for people. Many think they're impacted when they aren't and others are blissfully unaware of the maginitude of the tax their family will pay. For some, the change to unused pensions being included within the estate from 2027 will have a double-whammy effect of tax on the pension, and also the loss of some or all of the Residence Nil Rate Band, which tapers once the total estate value goes over £2m. Insurance is a simple and accessible way to provide for the tax liability. If structured correctly, when the insurance pays out on death, there is no tax liability on that, either. There are a number of other tools and strategies, but as each situation is different, it's key to get professional advice on the best way to plan for and mitigate IHT specific to the individual.
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Samuel Mather-Holgate
Managing Director & IFA at Mather and Murray Financial
Following the changes to IHT, people are starting to think about planning. Some are using life cover, some bonds and trusts, some business property relief. By far the biggest strategy adopted is gifting wealth away. We have seen more and more people opting to dish out their wealth during their lifetime, even using equity release to bump up the pay outs.
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Scott Gallacher
Director at Rowley Turton
We are definitely seeing clients express an interest in life assurance as part of their inheritance tax planning. Unfortunately, it's generally the poor relation in terms of inheritance tax planning as, unless you die early, you're effectively just paying the inheritance tax liability on the drip in the form of the cost of the life assurance cover. For farmers, with an illiquid asset such as their farm, it may be the best option. But for the rest of us, there are generally better and more proactive options.
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Philip Dragoumis
Director and Owner at Thera Wealth Management
We are seeing more and more clients looking at whole of life insurance mainly because pensions will be subject to IHT after April 2027. However, life cover can be expensive and importantly can only offset the tax on death. Gifting reduces the estate and the tax and is by far the better option. If gifting is subject to a cap or a lifetime tax, I expect I will recommend whole of life much more.