Transfers between spouses and civil partners are exempt from inheritance tax. This means the IHT liability for a married couple does not arise on the first death — it crystallises on the second. A joint life second death policy is designed precisely for this: it covers both lives and pays out only after the second death, providing the cash to pay HMRC at exactly the right moment.
How It Differs from Two Separate Policies
Two separate whole-of-life policies would each pay out on the respective deaths. The first payout arrives when there is no IHT liability — the surviving spouse inherits tax-free. The second payout arrives when the IHT bill falls due. A joint life second death policy skips the first payout entirely, covering only the event that matters for IHT purposes. This makes premiums significantly lower than two separate policies.
The Transferable Nil-Rate Band
When the first spouse dies without using their full nil-rate band, the unused portion transfers to the surviving spouse. A couple can therefore shelter up to £650,000 from IHT using the standard nil-rate band alone — or up to £1 million when the residence nil-rate band is also taken into account. The joint life second death policy should be sized to cover the IHT liability on the combined estate after these allowances.
Important: The joint life second death policy must be placed in a discretionary trust immediately. Without trust placement, the payout joins the surviving estate and is itself subject to inheritance tax — defeating the purpose of the policy entirely.
Reviewing the Policy Over Time
Estate values change. Property prices rise, investments grow, and new assets are acquired. The joint life second death policy should be reviewed every three to five years to ensure the sum assured still covers the projected IHT liability. A solicitor and financial adviser working together can model the estate value and adjust the cover accordingly.