Rysaffe planning and whole of life cover: paying inheritance tax when pensions join your estate
Estate planning / Inheritance tax
— Off-Piste Wealth Financial Planning Team
From 6 April 2027 most unused pensions count towards your estate for inheritance tax.
From 6 April 2027 most unused pensions count towards your estate for inheritance tax. For families with substantial pensions and estates, the increase can run into hundreds of thousands of pounds. Whole of life insurance written in trust is one way to fund it: the payout sits outside your estate, and trustees can usually claim it without waiting for probate. For larger policies, splitting cover across several trusts set up on different days (Rysaffe planning) can avoid the trusts' own ten-yearly tax charges. Rysaffe planning means using several trusts set up on different days, each with its own £325,000 nil rate band.
Why more families will face an IHT bill from 2027
Three things are happening at once.
- Allowances are frozen. The nil rate band has been £325,000 since 2009 and is frozen until April 2031. The residence nil rate band is £175,000 per person, also frozen.
- Pensions join the estate. Under the Finance Act 2026, most unused pension funds and lump sum death benefits will count towards your estate from 6 April 2027. Death in service benefits and dependants' scheme pensions stay outside. Read our pensions and IHT rules explainer for the detail.
- The residence nil rate band tapers away. For estates over £2m, you lose £1 of the residence nil rate band for every £2 over. A couple's full £350,000 is gone at about £2.7m. A pension that once sat outside the estate can now tip you over that line.
A worked example
A married couple in their early sixties own a £800,000 home, £450,000 of savings and investments and £450,000 of other assets. They each have a £600,000 pension. Everything passes to the survivor, then to their two children.
| Before April 2027 | From April 2027 | |
|---|---|---|
| Estate on second death | £1,700,000 | £2,900,000 |
| Nil rate bands (2 x £325,000) | £650,000 | £650,000 |
| Residence nil rate bands | £350,000 | £0 (fully tapered) |
| Taxable estate | £700,000 | £2,250,000 |
| Inheritance tax at 40% | £280,000 | £900,000 |
Nothing about the family changed, yet the bill rose by £620,000: £480,000 is 40% on the £1.2m of pensions, and £140,000 is the lost residence nil rate band. That is why the extra tax can exceed 40% of the pension.
The example assumes both spouses are UK resident, everything passes to the survivor, the home goes to the children, both allowances transfer in full, asset values stay the same, and there are no earlier gifts or debts. It is a snapshot, not a forecast.
If the survivor dies after 75, the children may also pay income tax on pension money they draw, with relief so the same money is not fully taxed twice. Executors can ask pension schemes to hold back up to 50% of benefits for up to 15 months, or to pay the IHT directly, so pension money can help with the bill, but it takes time.
Run your own figures
Use the inheritance tax calculatorThe options for meeting the bill
There is no single answer. Spending more of the pension in retirement, gifting surplus income, using the £3,000 annual exemption and leaving 10% to charity (which cuts the rate to 36%) all help. Our pension IHT planning strategies guide and countdown checklist cover these.
For many families, though, the bill is too large to give away in time, or they want to keep control of their money. That is where insurance comes in. Instead of trying to shrink the bill, you arrange for it to be paid.
How whole of life cover pays an IHT bill
A whole of life policy pays a fixed sum whenever you die, rather than within a set term. Couples usually choose joint life, second death cover, because IHT is normally due on the second death once the spouse exemption has been used.
Two details make it work:
- Written in trust. The payout goes to trustees for your children, outside your estate. Trustees can usually claim without waiting for probate, which helps because IHT is normally due within six months of death.
- Premiums as exempt gifts. Each premium is a gift into the trust. If paid regularly from surplus income, leaving enough to maintain your normal standard of living, it can be exempt as normal expenditure out of income. Otherwise the £3,000 annual exemption may cover it, or it may be a chargeable lifetime transfer. Keep a record of income and spending to support the claim.
| Type of cover | How premiums work | Best suited to |
|---|---|---|
| Guaranteed whole of life | Fixed for life | A long-term liability you want certainty on |
| Reviewable whole of life | Lower at first, then reviewed at set points in the contract; premiums can rise considerably | Cheaper start, with the risk of higher costs later |
| Term or gift inter vivos cover | Fixed for a set term | A liability you expect to reduce, such as a gift in its seven year window |
Some insurers will now underwrite cover sized for the post-2027 liability, so you can put protection in place before the change takes effect.
Does whole of life cover make sense versus investing the premiums?
This is the right question to ask. The alternative is to invest the same money yourself. The policy wins if death comes early; investing can win if you live a very long time and returns are strong.
The comparison has a twist. Money you invest and keep is part of your estate, so 40% of it may go in tax. A policy in trust pays out in full.
As an illustration only, take a premium of £1,000 a month for £500,000 of cover. This is how long investing would take to match the policy for your heirs:
| Net investment return | Pot left outside your estate | Pot left in your estate, taxed at 40% |
|---|---|---|
| 3% a year | 27 years | 38 years |
| 5% a year | 23 years | 31 years |
| 7% a year | 20 years | 26 years |
Hypothetical premium for illustration only. Not a quote.
This is a simplified comparison of monthly investments at a constant net return, not a prediction. Real returns vary, and investing keeps your money accessible while a policy can lapse if premiums stop. The answer turns on your health, life expectancy, expected returns and how much certainty you want.
Compare with a real quote
Use the whole of life vs investing calculatorWhat is Rysaffe planning?
Rysaffe planning means setting up several separate discretionary trusts on different days, instead of one, so that each trust has its own £325,000 nil rate band for the trust's own inheritance tax charges. It is most often used for large whole of life policies written in trust to pay an inheritance tax bill.
The Rysaffe case and the Rysaffe principle
The name comes from Rysaffe Trustee Co (CI) Ltd v Inland Revenue Commissioners [2003] EWCA Civ 356. Five discretionary trusts in identical terms were created on different days and later funded with shares. HMRC argued they were really one trust. The Court of Appeal disagreed: each trust was a separate settlement. This is known as the Rysaffe principle.
Why whole of life policies in trust need it
A discretionary trust can face its own IHT charge every ten years, up to 6% of the value above the nil rate band, and an exit charge when money leaves the trust. For these charges, a whole of life policy is valued at the greatest of its open market value, the total premiums paid, and any claim money held in the trust. This is the approach Royal London uses, and the prudent one to plan on. So on a large policy, once cumulative premiums pass £325,000, the trust can face a periodic charge even though nobody has died.
How Rysaffe planning works, step by step
- Work out the total cover needed, for example with our inheritance tax calculator.
- Split it into several smaller policies, sized so each trust's lifetime premiums stay under £325,000.
- Write each policy into its own discretionary trust, each set up on a different day. Insurers commonly use consecutive days.
- Pay premiums regularly, ideally from surplus income so they are exempt gifts.
- On death, the trustees claim and pay the money out promptly.
A Rysaffe planning example
This example is from Royal London. A man who will be 68 at his next birthday, a non-smoker, takes out £1.5m of whole of life cover. He can hold it as one policy in one trust, or as three £500,000 policies in three Rysaffe trusts set up on different days.
| One policy, one trust | Three policies, three Rysaffe trusts | |
|---|---|---|
| Sum assured | £1,500,000 | £500,000 each |
| Annual premium | £38,336 | £12,984 per plan |
| Total premiums after 10 years | £383,360 | £129,840 per plan |
| Nil rate band | £325,000 | £325,000 per trust |
| Premiums above the nil rate band | £58,360 | £0 |
| Periodic charge at 10 years (6%) | £3,502 | £0 |
| Total premiums after 20 years | £766,720 | £259,680 per plan |
| Premiums above the nil rate band | £441,720 | £0 |
| Periodic charge at 20 years (6%) | £26,503 | £0 |
Royal London Pegasus Whole of Life Plan, life cover, March 2026. Male, 68 next birthday, non-smoker, level lump sum. Premiums include the plan charge. Illustrative figures, not a quote.
Splitting the cover costs slightly more in premiums, £38,952 a year in total against £38,336, because each plan carries its own charge. In return, each trust stays under its own £325,000 nil rate band, so the periodic charges of £3,502 at year 10 and £26,503 at year 20 fall away, along with any exit charge when the money is paid out.
How many Rysaffe trusts do you need?
Royal London uses a simple method: work out the total premiums you could pay over a long life, divide by the £325,000 nil rate band, and round up.
Example: a couple aged 60 and 65 take out £3m of joint life whole of life cover with a guaranteed premium of £21,000 a year. Planning for the younger partner to reach 100 means the trust could face four ten-yearly charges.
| Years | Total premiums paid | Periodic charge in one trust |
|---|---|---|
| 10 | £210,000 | £0 |
| 20 | £420,000 | £5,700 |
| 30 | £630,000 | £18,300 |
| 40 | £840,000 | £30,900 |
That is £54,900 of periodic charges in total if everything sits in one trust.
£840,000 divided by £325,000 is 2.58, so you round up to three. The cover becomes three £1m policies, each in its own trust, at £7,000 a year each. Even after 40 years each trust has received £280,000 of premiums, below its £325,000 nil rate band, so no periodic charges arise.
Royal London illustrative example. Not a quote.
Rysaffe, pilot trusts and the 2015 rules
"Pilot trusts" were small trusts set up on different days and later topped up with large sums on the same day. Rules introduced in 2015 (same-day additions) now add those amounts together. Trusts made by the same person on the same day are also treated as related settlements. However, regular premiums paid at least yearly on a life policy are specifically excluded from the same-day additions rules, so Rysaffe planning can still work for protection, provided it is set up correctly.
Points to watch
- Each trust must be a discretionary trust and set up on a separate day.
- If premiums are not exempt gifts, each is a chargeable transfer that can reduce the nil rate band available to trusts set up later, so keeping premiums exempt matters.
- Claim money left in a trust at a ten year anniversary can create a charge, so pay it out promptly.
- It is only worth the extra paperwork when premiums would otherwise exceed the nil rate band over your lifetime.
- Trust and tax advice should be co-ordinated with your solicitor.
Keep a file for your executors
Executors have to value the estate, work out which exemptions and reliefs apply, and calculate the tax. They can only claim what they can prove. Keep one file with the gifts you have made and when, your policies and trusts, and every pension pot.
Gift order matters. If you make a chargeable gift into a trust and then a gift to a person within seven years, and die within seven years of the second, the first gift can still count. In effect this reaches back up to 14 years.
Frequently asked questions
What is a Rysaffe trust?
A Rysaffe trust is one of several discretionary trusts set up by the same person on different days. Because they are not related, each has its own £325,000 nil rate band for the trust's ten-yearly and exit charges.
How many Rysaffe trusts do I need?
Work out the total premiums you could pay over a long life, divide by £325,000 and round up. For example, £840,000 of premiums over 40 years divided by £325,000 is 2.58, so three trusts.
Does Rysaffe planning still work after 2015?
Yes, for protection. The 2015 same-day additions rules exclude regular life insurance premiums paid at least yearly, and the Rysaffe principle from the 2003 Court of Appeal case still applies.
Is Rysaffe planning tax avoidance?
It is established planning based on a 2003 Court of Appeal decision, and the 2015 rules specifically leave regular life insurance premiums out. It should still be set up with professional advice.
What is the difference between Rysaffe trusts and pilot trusts?
Pilot trusts were small trusts later topped up with large sums on the same day, which the 2015 rules now catch. Rysaffe planning for protection funds each trust with regular premiums, which are excluded from those rules.
Is whole of life insurance worth it for inheritance tax?
It can be if you expect a sizeable bill, want certainty and can afford premiums from surplus income. It is less attractive if you are likely to spend down your estate or are in poor health, where premiums may be high.
Do pensions count for inheritance tax from 2027?
Yes, most unused pension funds and lump sum death benefits count from 6 April 2027. Death in service benefits and dependants' scheme pensions do not.
Should the policy be written in trust?
Almost always. Without a trust the payout adds to your estate and could itself be taxed at 40%.
What if we are not married?
Unmarried partners do not get the spouse exemption or each other's unused nil rate band, so a bill may arise on the first death. Single life or joint life first death cover may fit better.
How Off-Piste Wealth can help
We model your estate before and after April 2027, compare insurance with gifting and investing, and arrange cover and trusts alongside your solicitor.
Figures use 2026/27 rules and may change. This article is for general information and is not a personal recommendation. Whether life insurance or trust planning is right depends on your circumstances. Life assurance is a regulated activity; some tax, trust and estate planning services are not regulated by the FCA. Off Piste Wealth Ltd is an appointed representative of New Leaf Distribution Ltd, which is authorised and regulated by the Financial Conduct Authority. FCA register number 955277.