11 July 2017

Life policies in trust

Life policies are often written in trust, so that the policy proceeds are not included in the estate of the life insured for inheritance tax (IHT) purposes, and the proceeds may be paid to the beneficiaries as soon as a death certificate is available. The payment of the premiums will often have no IHT consequence, even if paid within seven years before death, because they are met from surplus income.

This worked very well for policies written in trust before 22 March 2006, when the trust usually gave beneficiaries an ‘interest in possession’, so that the trust property was treated as owned by the beneficiaries for IHT purposes. Unfortunately, policies settled in such trusts after 21 March 2006 are treated for IHT purposes in the same way as discretionary trusts. The trust property is not treated as part of anyone’s estate. Instead, there is an IHT charge every ten years, and otherwise when property is distributed.

Before 22 March 2006 trustees would generally have nothing to do until a death occurred, and very little then. But trustees of policies settled from 22 March 2006 onwards have new responsibilities, because more than ten years have passed since the first policies were caught within the new regime.

Trustees should review the value of these policies – and consider reporting the ten-year anniversary charge. The earliest policy trusts affected could have had to report in September 2016.

Furthermore, all life policy trusts (including those written before 22 March 2006) will be ‘relevant trusts’, and therefore subject to the regime introduced by The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017/692. Once a liability to IHT arises, the trust will need to be registered with HMRC’s Trust Registration Service (TRS). And even if registration is not yet required, trustees must now maintain written records of the information that would be required for the TRS if the trust has to be registered.

Top-slicing relief

The gain realised on a ‘chargeable event’ affecting a non-qualifying life policy is subject to income tax, with credit for basic rate tax for UK-based policies. If the policy has been held for two or more years, top-slicing relief may reduce the tax on the gain that would otherwise be charged at a higher rate of tax. It has been suggested that in some cases this has been miscalculated by HMRC, generally to taxpayers’ detriment. HMRC is reviewing the situation.

Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary, if you would like advice or further information, please speak to your usual Shipleys contact.

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