This is a chapter from the Bloomsbury Professional book Houseman's Law of Life Assurance, 14th edition, which is an authoritative guide for insurance practitioners and covers every aspect of life assurance law. The latest edition of this key text includes coverage of the recent changes at the European level, including the creation of the European Insurance and Occupational Pensions Authority (EIOPA) and its role in the Solvency II Directive. It examines proposed changes to UK regulation being split between the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA). Other proposed changes covered by the book are the Retail Distribution Review.
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Table of Contents
Chapter 9 dealt with the general principles and fundamentals of settlements and trusts; Chapter 14 dealt with the general principles and structure of inheritance tax (IHT). This Chapter considers IHT mitigation, the relationship between IHT and estate planning using life assurance, the appropriate policies, and the appropriate trusts to consider in each case. Reference is made to the rationale behind the common specimen trust forms of life offices and also to specific trust wordings which may be required.
Individuals (and their advisers) should consider estate planning in order to minimise the IHT liability on their estates[1] and to create certainty as to the devolution of their personal assets upon death. Further, a grant of representation will not normally be issued (unless the estate is 'excepted')[2] until the HMRC account giving full details of the deceased's estate is lodged and any IHT due has been paid[3]. This can often cause financial difficulties and may require, for example, a loan to be taken for this purpose. There is an agreement between HMRC and the British Bankers' and Building Societies' Association that participating institutions will accept instructions from personal representatives to transfer sums standing to the credit of the deceased direct to HMRC in payment of inheritance tax before the issue of the grant. This is of considerable practical help where the personal representatives do not have ready access to other funds outside the estate, such as life policy proceeds written in trust. However, despite this, the use of life assurance policies effected to cover the IHT liability is still very important. It does not in itself ensure that the right sum of money is in the right hands at the right time, because (if the policy is subject to a trust) the policy proceeds will be paid to the trustees (for the benefit of the beneficiaries) whereas the IHT liability must be met by the deceased's personal representatives, out of the estate. Quite often, however, the policy proceeds will subsequently be paid by the trustees to the beneficiaries which will effectively replace the tax which has been paid out of the estate.
This Chapter looks at some wider aspects of the role and use of life assurance in estate planning. It considers various methods of reducing an individual's estate for IHT purposes, of ensuring that capital growth is outside the estate and of allowing retention of, control over and access to some of the investments made. Central to many of these methods is the use of trusts and the final Section considers the specimen trust forms provided by life offices, some of the more common trust wordings which may be appropriate, and their effect.
15.1 Before considering particular plans, it is appropriate to summarise some of the reasons why life assurance policies are so important in estate planning:
(1) A policy can provide funds on the death of the life assured to meet tax or other liabilities which may arise at that time.
(2) The proceeds are payable in cash and if the policy is qualifying and written under trust, payment can be made free of income tax and capital gains tax to the recipient (note that the underlying funds may have been subject to corporation tax) and may be paid free of IHT. (There may be IHT to pay as a result of a potentially exempt transfer (PET) proving chargeable or on death within seven years of a chargeable lifetime transfer: see further Chapter 14.)
(3) A life policy effected on a with-profits or unit-linked basis can provide capital appreciation which may not be taxed in the assured's hands (but note the possible taxation of the underlying funds).
(4) A person wishing to divest himself of capital over a number of years may do so very effectively by paying premiums, for example, within the £3,000 annual exemption or the normal expenditure out of income exemption to effect a life policy under trust.
(5) Trusts of life policies may be created quite simply at the outset of the assurance, and the trustees may prevent minor beneficiaries from having control of gifted funds until later in their lifetime.
(6) Payment of the proceeds on the death of the life assured under a trust policy can generally be made without waiting for grant of representation and may, in the case of Married Women's Property Act (MWPA) 1882 trusts, provide protection from creditors generally.
(7) A life policy is a flexible investment which, generally, can be surrendered, sold, used as security for a loan, gifted, charged, made paid up or varied.
(8) Finally, and most importantly of all, life assurance can provide protection for an estate owner's dependants in the event of his premature death.
15.2 There are several things which an individual may do, both during his lifetime and by making provisions in his will, to mitigate IHT. Since the introduction of capital transfer tax (CTT) (the predecessor to IHT), various schemes designed to reduce the value of an individual's estate or transfer assets without an IHT charge have been promulgated. Many of these schemes have been artificial, and others of such an esoteric nature that many an individual (hereafter referred to as an 'investor') has been reluctant to commit himself to the convoluted and often circular transactions necessary to achieve the desired aims.
It is important to bear in mind the result of a series of decisions by the courts, notably W T Ramsay Ltd v IRC[4] and Furniss v Dawson[5]. The essential principle emerging from these (and other) cases is that where there is a preordained series of transactions or a single composite transaction, which includes steps which have no commercial (business) purpose apart from the avoidance of a liability to tax, the steps inserted for no commercial purpose may be ignored. More will be mentioned of this principle later.
Life assurance can play a vital part in conserving estates by ensuring that funds are available to replace the capital that would otherwise have been lost as a result of paying the tax. Where no, or only restricted business property relief is available (see 14.37-14.38), life assurance may be the only means of helping small firms and private companies to stay in business. Similarly, where agricultural property relief is restricted or is not available at all, a life assurance policy could be the only way of making certain that funds are available to ensure that the agricultural assets pass intact to the desired beneficiaries (see 14.34-14.36).
Before deciding on the appropriate type of policy or policies, sums assured and other arrangements to minimise the charge to IHT and meet the IHT liability, it is necessary to know the investor's intentions for disposing of his estate upon his death, of any substantial lifetime transfers he may wish to make and his current (and likely future) requirements for income and capital. It is also necessary to consider the beneficiaries whom the investor wishes to benefit at these times and to consider the most suitable assets, in terms of tax efficiency and personal preference, to use for estate planning purposes. A balance will usually have to be found between the competing interests of the desire to pass property as tax efficiently as possible to an investor's children (or other desired beneficiaries) and the need to provide income for the investor and his spouse or registered civil partner for the remainder of their lives. For the remainder of this Chapter, spouse includes registered civil partner.
Prior to 9 October 2007, if a married couple were considering the mitigation of IHT, one of the standard planning techniques was to try to equalise their estates during their lifetimes so that each could pass up to the amount of the nil rate band on death by means of his or her will in favour of the children (or other potential beneficiaries), rather than leaving the whole estate on death to the surviving spouse thereby effectively wasting the nil rate band of the first to die. If this strategy could be adopted, any tax on the second death would therefore be reduced and could be provided for by means of a joint lives last survivor policy.
Of course, depending on the nature of the assets owned, it might not have been possible to do this in individual cases, for example, if there was a property owned as joined tenants or if adopting this course of action would have resulted in insufficient assets remaining for the surviving spouse to be able to afford to maintain his or her required lifestyle.
However, the position above was altered by proposals originally set out in the Pre-Budget Report 2007 and then contained in the Finance Act 2008[6], enabling the personal representatives of a surviving spouse who died on or after 9 October 2007 to claim any of the first spouse's unused nil rate band. The claim is based on the proportion of the unused nil rate band available on the death of the first spouse, effectively 'index linking' the nil rate band. In this way, leaving assets direct to a surviving spouse no longer wastes the nil rate band of the first spouse to die.
If someone marries a widow or widower, and survives them, it is possible to transfer the widow/widower's first spouse's unused nil rate band, up to a limit of one additional nil rate band. The same applies to someone widowed twice. For example, if someone has survived more than one spouse, on their death it may be possible to claim unused nil rate bands from more than one estate. However, the unused nil rate band accumulated for this purpose is limited to a maximum of the nil rate band in force at the relevant time (ie the last survivor's death).
15.3 Prior to 9 October 2007, if the position of the surviving spouse was a concern, a popular planning technique on the first death was to leave an amount up to the value of the nil rate band subject to a discretionary trust for the benefit of a wide class of beneficiaries which could include the spouse, children and grandchildren. As the surviving spouse would be a beneficiary he or she could therefore receive income or capital at the discretion of the trustees. (In practice, many testators left a non-binding expression of wishes to the trustees expressing their desire that the trust should provide primarily for the spouse as his or her needs require during his or her lifetime.) As the trust was discretionary, the value of the trust would not pass into the surviving spouse's estate. Income would only form part of the surviving spouse's total income to the extent that it was actually distributed and the distribution of capital within ten years would not give rise to an IHT charge[7]. If the survivor was likely to survive the tenth anniversary of the discretionary trust, consideration would have to be given as to whether it would be better to pay the principal charge[8] at the ten-year anniversary or to break the trust before that time. The decision may well depend upon the likely value of the property within the trust at the time of the ten-yearly charge (as the rate of IHT charge will depend, in part, upon the value of the property). It should be noted, however, that, on current rates, the maximum charge is 6% of the value.
Since 9 October 2007 and the introduction of the transferable nil rate band on death as described above, planning of this sort is no longer necessary purely from an IHT perspective. However, many couples have already included a NRB discretionary trust in their wills and there will generally be no need to make any changes to this as there are still many valid non-tax reasons why planning of this nature on the first death remains useful. It is therefore envisaged that the use of NRB discretionary will trusts will continue to be popular in the future, especially with wealthier clients who have more complex estates. Some of the advantages to planning of this sort are given below;
(a) Use of a discretionary trust avoids the spouse having total access and control of the assets. After the first death, it is possible that the surviving spouse could remarry. If he or she then predeceases the new spouse and leaves everything to him or her, it is conceivable that any children from the first marriage could effectively be disinherited. This could be avoided by the use of a discretionary trust on the first death.
(b) An alternative to using a discretionary trust in these circumstances would be for couples to make provision in their wills for a life interest trust in their estates to be given to the surviving spouse. If this is done, the capital supporting such a life interest will continue to form part of the estate of the survivor and will be covered by the spousal exemption. No liability to IHT will arise on the first death and the NRB remains fully transferable. This means that assets are not left outright to the surviving spouse and allows for control over the eventual destination of these assets.
(c) It is important to bear in mind that if a NRB discretionary will trust is used, any growth in the value of the assets will be kept outside the surviving spouse's estate, and if it is felt that the potential growth on the assets will outstrip the increases in the NRB, this will produce an IHT saving. This is particularly relevant now that the nil rate band has been frozen at its 2009/10 level and will remain so up to and including the tax year 2014/15, because it means that an IHT saving will be produced by any asset growth within the discretionary trust.
(d) Another advantage of the continued use of NRB discretionary trusts is the fact that, should it be necessary to place capital into the surviving spouse's hands at some stage, this can be done very effectively by the trustees making loans to the survivor. On the survivor's death, any such loans should form debts against the survivor's estate, further reducing the IHT bill at that time.
(e) Use of a discretionary trust also gives potential for keeping the assets out of the local authority's hands, if care fees become an issue for the surviving spouse.
(f) Leaving assets direct to children may not be desirable as should the child subsequently divorce or become bankrupt such assets would form part of his or her estate and would need to be taken into account. Use of a discretionary trust will mean that the assets will not form part of the child's estate and will not therefore be taken into account in these circumstances.
15.4 From 22 March 2006, all gifts into trusts created under a will are treated as gifts into a discretionary trust for inheritance tax purposes unless the trust falls within any of the following three criteria:
(1) it was created for the benefit of a minor child who will become absolutely entitled to the trust property on attaining age 18;
(2) it constitutes an Immediate Post Death Interest (IPDI) as set out in section 49A of the Inheritance Tax Act 1984. Briefly, to qualify as an IPDI, the settlement must have been created by the will of the deceased or under the intestacy rules, the life tenant must have become beneficially entitled to the interest in possession on the death of the testator or the intestate and the 'bereaved minor' rules as set out in section 71A of the Inheritance Tax Act 1984 do not apply, nor is the trust for the benefit of a disabled person. These latter two conditions have to apply for the whole of the period that the individual in question had the interest in possession; or
(3) it was created for the benefit of a disabled person as described in section 89 of the Inheritance Tax Act 1984.
Thus, any settlement not falling within these three criteria will be liable to the principal and exit charges in the same way as a discretionary trust.
15.5 As mentioned above, a significant practical problem when considering IHT planning is often that the principal asset is the family home, which is owned jointly by husband and wife or by registered civil partners. This was a particularly difficult problem before the introduction of the transferable nil rate band on death where the house formed a very significant part of the overall wealth of the couple. The ability to transfer any unused nil rate band of the first spouse to die to the survivor has negated this problem for many people but planning using the private residence is still useful in some cases. Where a husband and wife own the home as joint tenants, before any planning can be undertaken it will be necessary to sever the joint tenancy to create a tenancy in common. Once this has been achieved, each spouse may then leave their interest in the home to, for example, the children. This strategy may work perfectly well but it also could cause problems of a very practical nature. Assume a husband dies first and leaves his share of the home to his married son. In the event of the son subsequently getting divorced, the value of his interest in the home would be taken into account in the divorce settlement. He would also be entitled to move back into the home and, presumably, move in any new partner and/or children which might well not be to the liking of his mother. In the worst scenario it may even be possible for the son to subsequently force a sale of the home, leaving his mother looking for a new place to live.
There are, of course, other planning possibilities available involving the private residence such as transferring the half share of the deceased to a discretionary trust or gifting the house to the children and then paying them a fair market rent to continue to live there but these should not be considered without taking specialist legal advice. The gifts with reservation of benefit legislation (see 14.11-14.12) is a major problem in this area and this legislation was significantly tightened in the Finance Act 1999 following the decision in Ingram v IRC[9] and in the Finance Act 2004 following the decision in IRC v Greenstock[10].
In addition, since 6 April 2005, not only is there the gifts with reservation of benefit legislation to be aware of but there is also the pre-owned assets tax legislation to take into account – see 14.13.
15.6 The planning of estates will need different consideration when the estates comprise business assets such as shares in a private trading company, a professional or trading partnership or a farm (any of which may attract either business property relief or agricultural property relief – see 14.34-14.38). In those circumstances, children, other relations and non-family members might well have contributed considerably to the wealth which has been accumulated and may feel quite strongly that part of that wealth should find its way into their hands – especially if the principal estate owner is the first of the parents to die. With such estates it might be wise for more assets to be passed to the children on the first death, or a planned programme of lifetime transfers considered, although the capital gains tax (CGT) implications of lifetime gifting should be borne in mind. Life assurance can assist in such planning by providing funds to enable the surviving spouse to have an adequate income. In any event, assets qualifying for 100% business or agricultural property relief should ideally not be left to exempt persons, such as the surviving spouse, as this course of action effectively wastes the relief. Such assets should be left to non-exempt persons such as children, grandchildren or perhaps to a discretionary trust under which the surviving spouse could be a potential beneficiary. Another provision to consider is to effect a registered pension plan (depending on the business situation) which could provide dependant's income benefits after death. The contributions are tax effective as tax relief should be available subject to HMRC's normal requirements (ie the 'wholly and exclusively' test[11] see Chapter 14, Section 3). If the death benefits payable from a registered pension arrangement are held subject to a discretionary trust, in general there will not be a charge to IHT in respect of the death benefits[12].
If the premiums paid towards the trust policies mentioned in the various situations above are not exempt, under the normal expenditure out of income exemption or the £3,000 annual exemption, the tax treatment of the premiums will be as set out at 14.67.
15.7 In addition to providing funds to meet IHT liabilities when they arise, another role for life assurance in estate planning is to mitigate the IHT ultimately payable through a reduction of the individual's estate. This is achieved by creating a medium for the tax-effective transfer to others of funds which will achieve capital growth in the estate of the recipient, not that of the transferor. A common additional objective of the transferor is to retain control over, and have access to, the investment. A common misconception is that this type of planning will provide the transferor with an income in the true sense of the word – it will not. Life assurance policies are non-income producing investments. The marketing material of many policies, notably the single premium bond, states that they provide an 'income' for the policyholder. This is not actually income, but a return of capital, (hence, the term 'income' often being presented in inverted commas in the marketing material). Some of the range of available options are described below.
15.8 There are a wide variety of these arrangements which are sometimes known generically as 'inheritance trusts', but more commonly as 'gift and loan' or loan only shemes. The basic principle of a gift and loan scheme is that the investor establishes a settlement with a nominal sum, generally in favour of his children, and appoints additional trustees. The investor then lends a lump sum to the trustees of the settlement, expressed to be free of interest and repayable on demand (usually evidenced by a deed of loan agreement). The trustees invest the lump sum as a single premium in a unit-linked life assurance policy, typically a single premium bond, on the life of the investor (or the beneficiaries). By part surrender, the trustees withdraw from the single premium bond each year (for up to 20 years) a sum usually within the 5% pa tax deferred allowance[13] of the original investment to repay the loan. Any amount withdrawn in excess of the 5% allowance may result in a higher or additional rate tax charge on the investor (as settlor of the trust) or possibly on the trustees if the withdrawal occurs in a tax year subsequent to the death of the settlor.
The investor thus receives an 'income' whilst the capital sum and any growth upon it (less the amount of the outstanding loan) is held as part of the trust fund for the beneficiaries outside the investor's estate and therefore free of IHT. On the death of the investor/settlor, the outstanding loan will be paid to the personal representatives and will form part of the deceased's estate for IHT purposes. The initial gift is a transfer of value which will usually be covered by the £3,000 annual exemption. If it is not, it will be a PET if made before 22 March 2006, or if made to a bare or absolute trust on or after that date which will only prove chargeable if the investor dies within seven years of the declaration of trust[14]. If the gift was made to a discretionary or power of appointment interest in possession trust on or after 22 March 2006, the gift will be a chargeable transfer if not covered by any available exemption.
There has been some concern about the efficacy of gift and loan arrangements due to section 102 of the Finance Act 1986 which provides that where an individual 'disposes of any property by way of gift' and either it is not bona fide assumed by the donee or not enjoyed to the entire exclusion or virtually to the entire exclusion of the donor, then it constitutes a gift with reservation of benefit and will be treated as property to which the donor was beneficially entitled immediately before his death.
It may be argued that such an arrangement does not constitute a 'gift' as it is not given freely (in as much as the loan is repayable), although HMRC has expressed the view[15] that an interest-free loan is not a transfer of value for IHT purposes, but may be a gift, the gifted element being the interest forgone. They have stated further that an interest-free loan in itself is not a gift with a reservation of benefit but it may be if, for example: (1) there is a statutory provision to this effect, or (2) there is some other arrangement between the lender and the borrower related to the interest-free loan which has the effect of making the loan into a gift with reservation of benefit. Such an arrangement might include the use and enjoyment of other property or arrangements which were in some way collateral to the interest-free loan.
15.9 The IHT regime clearly contemplates the situation whereby a donor lends money to the trustees of a settlement. Schedule 20[16] to the Finance Act 1986, which supplements section 102, contains a provision relating to settled gifts[17]. It provides that where there is a gift into settlement, the property comprised in the settlement shall be treated as the property comprised in the gift and where property comprised in the settlement is directly or indirectly derived from a loan made by the donor to the trustees of the settlement, it shall be treated as property originally comprised in the gift.
The effect of this could be that everything in the settlement at the material date (the donor's death) is treated as derived from property originally comprised in the gift and could, therefore, bring the loan and the entire growth on any policy into the gift with reservation of benefit provisions.
However, having said that, such arrangements have been quite commonly entered into since the advent of IHT and, as far as the authors are aware, the Capital Taxes Office has yet to mount a successful challenge to them using the above legislation.
There is a variant of the gift and loan scheme which has become increasingly popular in recent years which is a loan only arrangement. The rationale behind this variant is that section 102 refers to a 'disposal of property by way of gift' and that if there is no gift, the gift with reservation of benefit provisions have nothing to bite on. The settlor merely makes a loan to the trustees who then use the loan monies in order to purchase a single premium bond from which they then take withdrawals to repay the loan.
Prior to 22 March 2006 these schemes traditionally used power of appointment interest in possession trusts and since that date either this type of trust or a full discretionary trust continue to be the most popular. Although gifts to this type of trust are chargeable transfers for IHT purposes as there is no gift involved in the loan only scheme and the gift involved in a gift and loan scheme would generally be within the annual exemption, this should not be a problem at outset. The main issue would therefore appear to be the principal charge at the ten-yearly anniversary. This would be calculated by reference to the value of the trust property at that time less the outstanding loan and may be an issue where very large loans are made.
This problem can be countered however, by effecting, say, two separate trusts on separate days, each involving half the amount of the loan. Each trust would have its own nil rate band and the chances of a periodic charge would therefore be halved. Planning of this type relies on the decision in Rysaffe Trustee Co (CI) Ltd v Inland Revenue Commissioners (2003).
15.10 Discounted gift plans aim to provide an immediate reduction in the investor's estate for IHT purposes; a regular tax-efficient income for the investor and death benefits for nominated beneficiaries which are free of IHT.
Under plans of this type the settlor puts a sum of money into a trust which carves out two separate interests. The settlor retains the right to receive a fixed sum each year for the rest of his or her life and all other benefits under the policy are for the benefit of the selected beneficiaries who do not include the settlor. The trustees subsequently purchase a single premium bond as an investment of the trust, the lives assured under which are not the settlor or his/her spouse and use the withdrawal facility (often at 5% for income tax reasons) to pay the settlor the specified sum each year.
This is a transfer at outset of a discounted value being the total amount being put into the trust less the present value of the settlor's right to the specified sum every year for the rest of their life. This is an actuarial calculation depending on the settlor's age, sex and state of health at the time. Underwriting will be necessary to back up the discounted value, although HMRC will always reserve the right not to agree with the life office's valuation. The transfer is a PET if an absolute trust is used or it is a chargeable lifetime transfer for any other sort of trust. The chargeable lifetime transfer has to be reported to HMRC at outset if it exceeds the appropriate reporting limits.
Payments to the settlor do not generate an exit charge. The periodic charge is based on the value of the bond less the value of the settlor's interest based on age, sex and state of health at that time, ie an updated discounted value. For this purpose, if the trustees are not aware of any significant health problems of the donor they can use the office's normal tabular discounted value updated for the current age. However, if they are aware of any health problems they must incorporate these into the valuation, thereby increasing it.
One office has a discounted gift scheme based on an offshore unit-linked capital redemption bond which matures after 99 years. The plan works in the same way as already described, but the carve-out is over the policy rather than the trust. The policy and the trust are therefore put into force simultaneously. The bond provides a fixed annual withdrawal which cannot be altered and will continue for the life of the investor as long as there are sufficient units in the bond. The bond cannot be surrendered during the lifetime of the settlor. The bond is written in trust so that the investor retains the right to the withdrawals but all other benefits are held for the beneficiaries of either an absolute trust or a discretionary trust under which the settlor is not a potential beneficiary although his or her spouse could be. On the settlor's death, the policy will continue as, under a capital redemption bond, death does not produce a chargeable event. Once the settlor has died, the policy acquires a surrender value so the trustees can decide either to surrender it or keep it going for the benefit of the beneficiaries.
This is not a gift with reservation as, although the benefits which accrue to the donees vary by reference to the benefits accruing to the donor, this provision (Finance Act 1986, Sch 20, para 7) does not apply because the underlying investment vehicle is a capital redemption bond not a life policy.
These plans are not subject to the POAT rules as they are carve-out schemes whereby the settlor's interest is held on a bare trust for him or her and the settlor cannot benefit from the policy in any other way.
15.11 In May 2007, HMRC published a Technical Note on how they expect discounted gift schemes to be operated by the various providers. The Note took effect for all cases completed on or after 1 June 2007. It is emphasised that this Note sets out HMRC's practice and does not seek to prescribe the approach that must be taken to establish the chargeable value for IHT. Alternative approaches may be used to arrive at broadly similar results and HMRC continues to be open to considering and agreeing alternative valuation bases that achieve that aim.
15.12 Following the changes to the IHT treatment of trusts from 22 March 2006, it became clear to HMRC that insurance companies were adopting differing practices with regard to underwriting the settlor's life, ranging from no underwriting at all through the so-called 'sealed-envelope' method whereby medical evidence was collected but was not used in the calculation of the discount advised to the client, to full underwriting. This approach would obviously affect the discount quoted and thus, the potential tax liability at outset. HMRC's preference was that full underwriting should be carried out prior to the discounted gift scheme being effected.
The open market-based valuation method requires that evidence of the settlor's health exists at the transfer date that is sufficient for the settlor's life to be underwritten to the standards required for whole of life assurance. If no evidence of health has been obtained at the outset, HMRC takes the view that a discount is not justified unless medical evidence sufficient to underwrite the settlor's life to the standards required for whole of life assurance was already in existence and can be produced should it be necessary to quantify the gift at a later date.
HMRC adopts this stance because problems can and do arise if no evidence of health was obtained at the outset and therefore is not reflected in the estimate of the value of the gift. On the death of a settlor, for example, where no evidence has been obtained, HMRC will often need to ask the settlor's personal representatives to obtain evidence about the settlor's health at the time the gift was made. This is undesirable as the surviving family may face intrusive and upsetting enquiries at a difficult time. This can be avoided if the information is obtained in advance. Problems can also arise where medical evidence is not collected until after the transfer occurs and it then becomes apparent that up-to-date medical details are not held. This would be insufficient evidence on which to underwrite to the standards required for whole of life assurance and would therefore result in no discount. Additionally, survivors may not have been party to the transaction entered into by the settlor. They may feel entitled to particular treatment based on expectations given by financial advisors and then feel aggrieved when HMRC begins investigating.
15.13 A discounted gift scheme involves a gift of a bond from which a set of rights is retained, typically withdrawals or a set of successively maturing reversions. The retained rights are sufficiently well defined to preclude the gift being regarded as a gift with reservation for IHT purposes.
The gift is a transfer of value for IHT purposes, whose value is determined by the loss to the estate principle. This is set out in IHTA 1984, s3(1), and quantified by the difference between the amount invested by the settlor and the open market value (OMV) – IHTA, s160 refers – of the retained rights.
The OMV of the retained rights will depend on, among other things, the settlor's sex, age, health and thereby insurability, as at the date of the gift. If the settlor were to be uninsurable, for any reason, as at the gift date, the OMV of the retained rights would be nominal and the gift would be close to the whole amount invested by the settlor. This is because IHTA 1984, s160 provides that, in valuing the retained rights, it is necessary to assume that a sale of them takes place.
In investing in the retained rights, the open market purchaser (OMP) will need to take account of the rate of return he or she requires and the cost of insuring the settlor(s) life.
As mentioned previously, the aim of the Technical Note is to set out HMRC's practice, not to prescribe the approach that must be taken to establish the chargeable value for IHT. HMRC's current mortality and interest rate basis is:
(a) Mortality: 70% of AM/AF 80 Mortality (reflecting the improvement over the table for assured lives for males and females published by the Continuous Mortality Investigation Bureau in 1990 reference CMIR 10).
(b) Interest rate: 5.25% a year.
Open market purchaser's costs: 3% (as a deduction from the present value of the retained rights).
HMRC reviews its interest rate assumptions on a regular basis. When the Technical Note was originally published to take effect from 1 June 2007, a valuation rate of interest of 6% a year was used. This was subsequently increased to 6.75% from 1 September 2007 as HMRC analysis indicated that such a rise in the rate was warranted. The increase reintroduced the differential over base rate and corresponded to a 1% differential over short-term gilts. The interest rate was reduced from 1 February 2009 to 5.25%. It is not clear how HMRC arrived at this figure as a 1% differential over short-term gilts at that time would have meant an interest rate of approximately 3.50%.
The valuation basis is kept under regular review to ensure that it continues to reflect open market conditions and it is HMRC's intention to publish future changes to the valuation basis on their website.
15.14 As stated previously, IHTA 1984, s160 provides that, in valuing the retained rights, it is necessary to assume that a sale of them takes place. HMRC has looked for evidence of sales of assets similar in nature to the retained rights, for example, life interests or contingent reversions which are dependent upon the survival of the relevant life to a series of predetermined dates. Its evidence indicates that such rights are not saleable unless life assurance can be effected on that life by the open market purchaser (OMP) or it comes as part of the sale. If it cannot be effected, market evidence shows that those assets will not sell. Without life cover being in place, the OMP is at risk of anything up to the total loss of his or her investment should an early death of the settlor occur. HMRC considers it to be fundamental that the open market valuation of the retained rights should be carried out having regard to what market evidence is available. Additionally, it has been unable to find any evidence that it is possible to effect cover on lives older than 90 next birthday. HMRC therefore regards lives aged 90 and over, or mortality rated to be aged 90 or over, as being uninsurable with the result that only a nominal discount will apply in these circumstances.
This approach was challenged in Bower v IRC (2007) (SpC). In this case, the settlor was aged over 90 when the policy was effected and died within seven years of the gift. HMRC contended that the discount should only be a nominal £250 but the Special Commissioner disagreed and valued the discount at £4,200. HMRC appealed this decision and their appeal was upheld in the High Court in November 2008 when the £250 figure was confirmed as the valuation. The current position for settlors aged 90 or over or rated as being 90 and over is as was originally set out in the Technical Note, namely that only a nominal discount will be given.
15.15 Prior to 1 June 2007, HMRC took a pragmatic approach to calculating the value transferred where there were joint settlors, such as a husband and wife or registered civil partners. This approach was to value the retained rights in their entirety and deduct this amount from the total sum invested. The value of the transfer was then apportioned between the settlors in the proportions in which they provided the sum invested.
In practice, where the joint settlors are of similar ages and in similar states of health, the results of this pragmatic approach do not differ dramatically from the results of considering the value of each settlor's retained rights individually.
Following the changes brought about by the Finance Act 2006, it is understood that HMRC saw a number of cases where discounted gift schemes were taken out where there was a significant age difference between the joint settlors, or where one of the joint settlors was in very poor health or even uninsurable. In such cases, the pragmatic approach did not achieve a reasonable result. HMRC had also been asked to clarify the correct method of valuation in these circumstances as different providers were calculating the gift values using different methods, resulting in a lack of consistency. This also meant that taxpayers and their advisers were unclear as to which approach was correct. In the light of this uncertainty, HMRC set out in the Technical Note what they consider to be the correct valuation approach. They intend to follow this approach for all discounted gift schemes where the transfer takes place after 1 June 2007. They will also use this method where a transfer has taken place before that date and the pragmatic approach would rovide an unreasonable valuation of the settlor's retained rights and substantial sums are involved.
In HMRC's view, the correct approach is to value the retained rights in their entirety and to apportion this value between the joint settlors by reference to the OMV of each settlor's retained rights. In the case of joint settlors who are married or in a civil partnership, the related property provisions of the IHTA, s161 are to be taken into account in this valuation.
It is recognised that where there are significant differences in the ages of the settlors (whether their actual ages or their effective ages for insurance purposes), it is technically possible for the value of the retained rights to be calculated as a negative amount using the above approach. It is also technically possible to calculate the value of the retained rights as exceeding the contribution of the settlor. The value of the lifetime transfer is calculated, in accordance with IHTA, s3(1), as the loss to the transferor's estate. If the value of the retained rights is negative, the loss to the transferor's estate cannot exceed the amount contributed, ie there cannot be a negative 'discount'. If the value of the retained rights exceeds the settlor's contribution, there would be no loss to the estate and therefore no transfer of value.
It is understood that HMRC does not propose to re-open cases where the values transferred have been accepted in accordance with their previously adopted pragmatic approach.
15.16 As stated previously, the Technical Note is simply HMRC's view on how they expect discounted gift schemes to be administered. Individual aspects of the guidance contained within the Note are, of course, open to challenge through the courts in the normal way as has been seen in the Bower case. Nevertheless, the Technical Note will be a comfort to all those offering advice in this area as it does set out precisely how HMRC views arrangements of this type.
15.17 The purpose of this arrangement is to take advantage of the investor being able to take the full 5% annual allowance as 'income', until his interest is exhausted, whilst being able to gift away a percentage of the capital sum. The investor effects a single premium bond and carves out two separate interests in trust under it: an interest for himself absolutely (the retained or the donor's part) and the donee's part which is held on flexible trusts for his chosen beneficiaries. The investor is excluded from the donee's part and so there is no gift with reservation in relation to that part.
The 5% tax deferred withdrawal provisions refer to the initial investment in the single premium bond, not to the proportional part of the policy which the investor retains under his part of the trust. Therefore, at any time, the investor can ask the trustees to pay part of his entitlement. To be tax efficient, they would normally do this from the 5% annual entitlement, and such trusts often contain a provision to this effect. All the withdrawals must be deducted from the donor's part, which may, therefore, if the donor's part grows at a lesser rate than the total withdrawal, erode. In this way, the donor's part may be progressively reduced, or even eventually extinguished, leaving an increasing proportion of the bond in the gifted part. Once the donor's part has been completely exhausted, there can be no further payments to the investor, by way of withdrawal or otherwise, as this would constitute a gift with reservation and therefore not be IHT effective.
Prior to 22 March 2006, assuming the trust was an interest in possession trust, the transfer would have been a PET and if the death of the donor occurred within seven years, the PET would prove chargeable and the usual provisions would apply (see ). The balance, if any, of the donor's part, would be paid to the investor's estate and would be aggregated with his estate for IHT purposes. From 22 March 2006 onwards, gifts into such trusts are chargeable lifetime transfers unless the trust used was an absolute trust.
It can thus be seen that the true value of this type of arrangement lies with the ability to take withdrawals from the total original investment thus enabling a greater 'income' to be enjoyed. The IHT benefits are no different from the settlor simply effecting two bonds, one for his own benefit and the other in trust for the selected beneficiaries.
15.18 Under these plans, a series of endowment assurances are effected which are set to mature at yearly intervals. These policies cannot be surrendered. The policies are all written subject to trusts under which the right to the maturity proceeds of the policies is retained by the investor for his own benefit but should the investor die before the maturity date of a policy, the death benefits are held for the remaining beneficiaries. Each year, a policy will mature and the proceeds will be paid to the investor which he can use as 'income'. These plans involve a discount which is calculated by reference to the actuarial value of the policy proceeds which the investor is likely to receive back by way of maturing policies.
There is a variant of these plans which does not provide for an immediate discount. Under this variant, it is possible, when a policy is approaching a maturity date, for the trustees to extend the policy if the settlor does not require the policy proceeds as income. Furthermore, this course of action does not involve a further transfer of value by the settlor.
Traditionally, the above plans have used interest in possession trusts to take advantage of the fact that the initial gift involved in creating the trust was a PET. However, with effect from 22 March 2006, all transfers into such trusts will be chargeable transfers and thus there may be inheritance tax to pay at the outset if the amount of the gift (together with any previous lifetime transfers made within the last seven years) is more than the nil rate band in force at the date of the gift. In addition, the trust may also be liable to the principal charge on the ten-year anniversary, depending on the value of the trust property at that date, and the exit charge when capital leaves the settlement.
Generally, from 22 March 2006, gifts into these arrangements will be restricted so that the amount of the initial transfer is within the nil rate band. Care will also be needed regarding the ten-yearly charges.
15.19 These plans are a combination of a whole life policy and a life annuity running 'back-to-back'. A lump sum is paid at outset, most of which buys an annuity for the life of the individual. The balance is used to pay the first premium under a whole life policy, effected under trust for the individual's beneficiaries. This is a gift for IHT purposes, but will normally be exempt under the annual exemption. The annuity is paid out, say, annually, part funding the whole life premium and the rest being available for the individual to spend as income. The annuity is a purchased life annuity and so only the interest content is taxable, the rest being the tax-free capital content.
On death, the annuity ceases and is worth nothing for IHT purposes. The life policy pays out free of IHT to the beneficiaries. There is no income tax charge because the whole life assurance is a qualifying policy. These plans are very effective for getting large amounts of capital out of the estate, whilst still giving the individual an income. They are available on a single or joint life second death basis for married couples and registered civil partners.
The individuals have to be in reasonable health because they have to be underwritten for the whole life policy. If both contracts are written by the same life office, it will not be concerned when death occurs because the 'loss' on an early death under the whole life policy is matched by the 'gain' on the annuity contract. However, section 263 of IHTA applies to back-to-back policies, unless it can be shown that the contracts were not associated operations. If the section applies, the transfer of value is the lesser of the total initial lump sum and the whole life sum assured – which would render the plan totally ineffective. The case of Smith v HMRC (2007) (SpC) confirmed the potential associated operations treatment of back-to-back policies. In order to show that the contracts are not associated, the whole life policy must be underwritten without reference to the annuity. The best way to establish that the two contracts are not associated is to use different life offices, which will also be beneficial in that the best rates for each type of contract can be obtained; it would be unlikely that one office would offer both the best whole life rates and the best annuity rates on the market. If the same office is used for both parts of the plan, it is essential that full medical evidence is obtained to underwrite the life policy.
A variant on this back-to-back theme is the combination of a purchased life annuity, and a term assurance which pays out on death before age 110 (or after 50 years if earlier). The effect is very similar to a whole life back-to-back plan, although the term assurance rates and sums assured are guaranteed, so it does not rely on any with-profits return or unit-linked growth rate.
15.20 Before the introduction of inheritance tax these types of plans were well known. The investor purchased two plans: a pure endowment (ie without death benefit, the benefit only being payable on survival) under which a fixed 'income' (usually within the 5% tax-deferred entitlements so as not to attract a charge to higher rate tax)[18] was taken, and a term assurance which was written under a flexible power of appointment trust to ensure that the sum assured (which was equal to the bid value of the units under the pure endowment) was out of the investor's estate. For IHT purposes, the transfer of value, which would, under the legislation in force before 22 March 2006, have been a PET, would be the sum of the total investment into the plan less the value of the investor's retained interest under the pure endowment policy, at the time of effecting the arrangement. (This will be calculated on actuarial principles, depending on age, sex and health at the time the trust is declared.)
Following the tax avoidance line of cases referred to above and the Finance Act 1986, these plans were thought to have been rendered wholly ineffective for IHT purposes. The effect of the Finance Act 1986[19] is that such an arrangement (where the benefits accruing to the donee under a life assurance policy are measured by reference to benefits accruing to the donor under that or another policy) is thought to be treated as a gift with reservation of benefit.
However, similar plans are now once again available in the market. The companies which offer these plans have tried to avoid the effect of the Finance Act 1986 by having a fixed sum assured under the term assurance (which would be the value of the original investment of capital in the endowment policy) rather than one which varies with reference to the value of the endowment policy.
15.21 Traditionally most trusts have invested in portfolios of quoted securities although this has perhaps always been a slightly questionable policy, particularly in the case of smaller trusts where a collective investment scheme or a single premium bond could offer all the advantages of diversification and professional fund management at a reasonable cost. However, since the passing of the Trustee Act 2000 which imposed on trustees the duty to ensure the suitability of any investments they make, the arguments in favour of this type of investment have increased. Furthermore, the above Act now gives wide investment powers to virtually all trustees and thus there should no longer be a question about whether or not trustees have the power to make investments in life assurance policies.
In considering insurance policies five factors need to be taken into account:
(1) Insurable interest. The trustees will need to exhibit an insurable interest in the life of a beneficiary on whose life the policy is to be effected.
(2) Investment powers. This should no longer be a problem as modern trusts will generally have sufficiently wide investment powers to invest in such policies and the Trustee Act 2000 now confers wide investment powers on all trustees unless their powers are specifically restricted by the terms of the trust.
(3) Power of advancement. It is advisable (as most modern trusts do) to extend the statutory power of advancement under section 32 of the Trustee Act 1925 to apply to the whole of the trust fund (the statutory power only extends to one half of the trust fund). The trustees may then exercise this power either from time to time or on a more regular basis to make capital payments to a beneficiary.
(4) Other taxation consequences. As a single premium bond is a non-qualifying policy a chargeable event could arise on its encashment or if withdrawals in excess of the 5% annual entitlements are taken. If this happens then any gains arising are assessable to tax in the manner described later in this Section, and in more detail in Chapter 13.
(5) Life tenant. If there is a life tenant such an investment may not be appropriate as no income would be produced and capital could not normally be advanced to him. Even if a power exists to advance capital to a life tenant, care should be exercised – see later in this Section.
A single premium bond as a trustee investment has the advantage of much simplified administration from the trustees' viewpoint. As a life assurance policy, it is outside the scope of capital gains tax and thus there is no need for the trustees to concern themselves with the trustees' annual CGT exemption or with the complexities of taper relief. Furthermore, as a non-income producing asset, completion of the trust tax return is again simplified.
15.22 The ability for trustees to utilise the 5% tax deferred annual entitlement as a means of making tax-efficient payments to beneficiaries is also a big advantage, especially when one bears in mind the changes to the system of dividend tax credits from 6 April 1999 which affect discretionary and accumulation and maintenance trusts and may result in a serious reduction in net income for beneficiaries where the original source of that income is dividends.
The tax treatment of any such capital payments in the hands of beneficiaries should also be considered. In certain situations, capital payments out of a trust (eg 5% withdrawals from a single premium bond) may be treated by HMRC as adopting the nature of income for income tax purposes, in the hands of the recipient beneficiary, based on the decision in Brodie's Trustees v IRC[20]. In this case, the trustees of a will held property upon trust to pay the income to the testator's widow for life with a provision that if, in any year, the income did not amount to £4,000, the trustees were to use capital to ensure that no less than £4,000 was paid to the widow. On the occasions when this happened, HMRC contended that these capital payments were made to satisfy an income entitlement and should thus be taxed as income in the widow's hands. This view was subsequently supported by the court. However, this should be contrasted with the later case of Stevenson (Inspector of Taxes) v Wishart[21].
This case concerned regular monthly capital payments made from a discretionary trust to the beneficiary who was in a private nursing home. In making them, the aim of the trustees was to meet the cost of maintaining the patient, including medical and other expenses. HMRC maintained that such recurrent payments were paid for an income purpose and were therefore income in the hands of the beneficiary and thus liable to income tax and they raised assessments accordingly. In disagreeing with this stance the court distinguished its ruling from the precedent set in the Brodie case. In Stevenson v Wishart, the payments were deemed to be wholly of a capital nature and, apart from their recurrence, there was nothing to indicate that the payments were to be seen as income. It was suggested at the time that the case was only of limited application although experience does not seem to have borne this suggestion out. The decision in this case appears to indicate that where trustees are not specifically required to augment income out of trust capital, regular payments of capital to a beneficiary from a discretionary trust or an accumulation and maintenance trust should present no income tax problems, provided they have powers of advancement and exercise their discretion in making any such payments.
15.23 When considering interest in possession trusts it should be borne in mind that under such trusts there is an individual or individuals who are entitled to the income produced by the trust. If the trustees select a single premium bond as their investment, this is a non-income producing asset and thus any trustees contemplating this course of action should ensure that the trust confers powers on the trustees to make advancements of capital to the person or persons with the interest in possession.
For interest in possession trusts, however, the possibility of an attack by HMRC using the Brodie decision remains if regular capital payments are made to the life tenant of the trust. If a single premium bond is contemplated as a trustee investment in these circumstances it is recommended that the trustees take irregular withdrawals of income at irregular intervals in order to reduce the chances of such an attack.
The final point to consider is the tax treatment of the bond when it is encashed. Prior to 18 March 1998 where a policy was held in trust, any gains arising on the occurrence of a chargeable event were assessed on the creator of the trust. Thus, if the chargeable event occurred in a tax year following the death of the creator, provided there was no one beneficiary who was absolutely entitled to the trust fund at that time, there would be no charge to higher rate tax, as there would not be anybody living on whom it would be possible to raise an assessment[22] – this was referred to as 'the dead settlor' rule. This created some useful estate planning opportunities. Any bond that was effected by trustees of a trust created under a will could obviously benefit from this legislation. During lifetime, to take advantage of the dead settlor rule, an investor (normally the older spouse) could effect a joint lives last survivor single premium bond, of which he had sole ownership. The bond had to be subject to a trust to take advantage of this rule (although the trust could have been created during lifetime or under the terms of the investor's will).
The aim of the arrangement was to avoid any liability to higher rate tax by encashing the bond in a tax year following the death of the creator of the trust. This obviously relied on the sole owner actually being the first of the lives assured to die. In order to be certain that any such liability was minimised, it was often preferable to split the investment, so that the investors each effected a joint lives last survivor single premium bond and put it in trust (either during lifetime, or in the terms of their wills).
Another way of taking advantage of this rule was for the investor to purchase a capital redemption bond. Under this type of policy, the death of the investor (who would have been the creator of the trust) is not a chargeable event, and so, provided the 'term' is long enough, use could always be made of the 'dead settlor rule'. It was preferable for a trust of a capital redemption bond to remain 'flexible' for 80 years (to be consistent with the perpetuity period that existed as at 17 March 1998 thereby retaining flexibility for a longer period than in the standard specimen trust forms (see below) provided by life offices which commonly provide for the flexibility to cease two years after the death of the investor.
These rules still apply in situations where the creator of the trust died before 18 March 1998 and the policy was already in force at that date provided that the policy is not enhanced in any way after that date. In all other situations new rules contained in what was a revised section 547(1) of ICTA 1988, and is now sections 465 and 467 of ITTOIA 2005, apply. These new rules also state that when a chargeable event occurs in respect of a bond written subject to a trust the tax charge will still be based on the income of the settlor of the trust provided he is alive and resident in the UK. However, if the settlor is dead or non-UK resident, any chargeable event occurring in a tax year after the death of the settlor would be assessed on the trustees. The gain would be chargeable on the trustees at the rate of 50% in respect of an offshore bond but if the policy was effected with a UK life office, the trustees would get credit for basic rate tax deemed to have been paid within the fund and thus would only have to pay tax at 30% on the gain.
It may be possible to avoid this charge if the bond, or segments thereof, were to be assigned by the trustees to the beneficiaries assuming that they have attained the age of 18. Such an assignment would not trigger a chargeable event and any gain arising on a chargeable event after the assignment would then be assessed on the beneficiaries.
15.24 Life assurance can help in minimising the effect of IHT by providing a medium for taking advantage of the annual exemption. For example, where an estate is to pass to children and consists mainly of readily realisable assets, bank or building society deposits, the individual might use capital to pay premiums, within the limits of the available exemptions, for a life policy written under trust. The policy proceeds would provide a tax-free 'legacy' on the life assured's death and, moreover, the IHT liability on the estate would be reduced by the withdrawal of capital.
Similarly, if an individual wishes to make a lifetime transfer of cash (ie income) to his children, he may make use of the annual exemption to build up a tax-free lump sum by paying premiums towards an endowment assurance written in trust for the children's benefit.
Furthermore, in some instances, IHT will be payable as a consequence of the donor dying within seven years of making a gift. This applies to gifts which are not fully exempt but which are either PETs or CLTs. Upon a donor dying within the seven-year period, a tax liability may arise in respect of the gift. The tax liability decreases over the seven years (after the third year) due to taper relief which could, if appropriate, be planned for by a seven-year decreasing term assurance.
It would not be appropriate to use a seven-year decreasing term assurance where, at the date of the particular PET or CLT, there are no relevant previous transfers and the amount of the PET or CLT falls within the nil rate band. The nil rate band is applied first of all against lifetime transfers and so in the event of the PET or CLT proving chargeable, it could be covered by the nil rate band and no IHT would be payable. The appropriate policy in this instance may be a seven-year level term assurance, in trust for the residuary beneficiaries of the investor's estate in order to cover the increased amount of IHT which would be payable by the personal representatives as a result of the nil rate band being used (in whole or in part) by lifetime transfers of value, thereby reducing the amount of the IHT-free estate upon death.
15.25 The proceeds of a whole life policy effected by a person on his own life and for his own benefit will be aggregated with his estate on his death and will be chargeable to IHT. For estate planning purposes, therefore, it is better to assign the policy or declare a trust of it in order to remove the value of the policy at the time of the gift (and any sum assured which becomes payable) from his estate. Further advantages are that the sums assured will be paid to the trustees (the policyholders) upon proof of death of the life assured and proof of their title to the policy, without having to wait until a grant of representation is obtained.
In the case of an endowment assurance, it may be desirable for the policy to remain for the assured's own benefit if he survives, where, for example, it is to provide for retirement. HMRC have confirmed that the retention by the settlor of a reversionary interest under an interest in possession trust effected before 22 March 2006 is not considered to constitute a gift with reservation of benefit[23].
15.26 Many life offices (and financial advisers) have specimen trust forms which a proposer or policyholder may use to place a policy in trust. In all cases, these trust forms are provided as specimens. Due to the nature of trusts and of the relevant surrounding personal circumstances of the investor, it is strongly advisable that the investor takes independent legal advice to ensure that the particular specimen trust form meets his requirements in the particular case and does not conflict with any existing arrangements.
Commonly, life offices have two categories of trust form, a trust request form and a declaration of trust form. These are designed to be used in two different sets of circumstances. The trust request form is designed for use by the investor at the time of proposing for a policy (or any time before the date of assurance), whilst the declaration of trust is designed for use at any time after the date of assurance. It is important that these forms are used correctly.
If an investor wishes a policy to be written in trust from the outset[24], the trust request must be submitted to the life office before the date of assurance, and preferably at the same time as the proposal form is submitted. In this way, the policy is placed in trust as a matter of contract between the investor and the life office. A common form of wording in the trust request form is as follows:
'I hereby declare that I make the proposal dated [ ] on the terms that the policy of assurance effected and issued as a result of that proposal on my life should be issued to me as trustee and all moneys payable and benefits under the policy (the Trust Fund) shall be subject to the following trusts: …'
If the trust request form is not received by the life office before the date of assurance, there is some doubt as to whether, legally, a valid trust will be created (ie whether the trust will be completely constituted). If the trust is not completely constituted, it cannot be enforced, the settlor could revoke the trust and there could potentially be problems as between any competing beneficiaries or potential beneficiaries of the investor's estate.
The standard trust forms should also contain suitable clauses giving the trustees power to surrender, mortgage, charge or otherwise deal with the policy, together with wide powers of investment, power to delegate investment decisions, power for the investments to be held by nominees, an extended power to advance capital to a beneficiary up to the full amount of his or her vested or prospective share, and clauses providing for the remuneration of corporate or professional trustees and for the appointment of new trustees.
A standard trust form for a Scottish trust should also contain express powers of delegation, as the common law and the Scottish statutes do not allow any form of delegation.
15.27 Prior to 22 March 2006, the most popular type of trust for life policies was the power of appointment trust which gave an interest in possession to named or identified beneficiaries.
The power of appointment trust is usually in two parts, giving an immediate interest in possession to named or identified beneficiaries, known as the default beneficiaries, with an overriding power in the hands of the trustees to change the beneficial interest, either revocably or irrevocably, to any of a class of 'potential beneficiaries' listed on the trust form. For trusts created prior to 22 March 2006 this gave all the advantages of placing a policy in trust already referred to (eg proceeds free of IHT), whilst retaining the ability to change the beneficiaries and being able to cater for unforeseen circumstances at the time the trust was created, eg by way of changes in the needs or structure of the investor's family and dependants.
The specimen trust forms will often provide a choice for the investor as to whether he wishes the default beneficiaries to hold their interest in equal shares absolutely or absolutely. Subject to the trustees' power to appoint the beneficial interest to another, in equal shares absolutely means that on the death of a beneficiary, his beneficial interest would pass according to his will (or the Intestacy Rules), whilst absolutely (without more) could mean that his beneficial interest passes to the remaining beneficiaries.
Life office trust forms are often drafted in such a way that the power of appointment exists until two years after the date of the death of the settlor. This is to be consistent with the IHTA provisions[25] relating to the variation of dispositions comprised in the settlor's estate and the reverter to settlor or settlor's spouse exemption within two years of death (see Chapter 14). Therefore, unless the trustees make an irrevocable appointment, the power of appointment does not cease until the expiry of that period.
If a new power of appointment interest in possession trust is effected on or after 22 March 2006 such a trust would fall within the relevant property regime. So whereas some companies continue to use trusts of this type, most providers tend to offer discretionary trusts where some element of flexibility in deciding who the beneficiaries should be is required. As an alternative to this type of trust, providers will also offer bare or absolute trusts.
Of course, many interest in possession trusts which were effected before 22 March 2006 still remain in force and it should be noted that if the power of appointment is exercised after 5 October 2008 under such a trust, and the trust remains in existence, this will have the effect of turning the trust (or at least the beneficial share in it that was altered) into a relevant property trust and thus causing it to be potentially liable to the ten-yearly and exit charges (see Chapter 14, Section 6B).
15.28 It is important, however, if a trust policy is to fulfil the purpose for which it is effected, that the provisions of the trust should clearly and correctly set out the grantee's intentions regarding the persons he wishes to benefit and the nature of their interests. The following Section considers the various dispositions of the policy benefits most frequently required by proposers, draft forms of trust wording for incorporating those dispositions in the trust policy, and discusses the tax and legal implications of doing so although some of these wordings are now of historical interest only owing to the fact that all new policies effected on or after 22 March 2006, unless written subject to absolute or bare trusts, will be treated as discretionary trusts in which no individual will have an interest in possession and all benefits will be payable at the trustees' discretion.
Before considering these draft trust wordings, it is necessary to mention a number of preliminary matters.
If not exempt as normal expenditure out of income, or by use of the £3,000 annual exemption, the premiums paid towards trust policies (if the trust is an interest in possession or accumulation and maintenance trust created before 22 March 2006)[26] will be lifetime transfers for IHT purposes and may be treated as PETs. Prior to 22 March 2006, in order for such transfers to be PETs, the property transferred must become settled property[27]. This presented no problems in relation to the first premium paid, but was obviously an issue where a premium is paid by an investor on a life policy already held on trust. The second or subsequent premiums therefore were only PETs to the extent that the value of the estate of the beneficiary(ies) was increased. This meant that only the part of the second or subsequent premiums which actually increased the market value of the policy will be a PET. The investor could ensure that these payments constituted PETs by making gifts of cash to the trustees who would then pay the premiums, rather than paying the premiums to the life office directly. However, since 22 March 2006, the position is now that any premiums payable in respect of policies issued under such trusts in excess of the available exemptions will be PETs. Since that date, cash gifts to the trustees to enable them to pay the premiums would no longer be necessary or desirable. For policies effected on or after 22 March 2006, if an absolute trust is used, the position will be as set out above. If this is not the case, any premiums in excess of the annual exemptions will be chargeable lifetime transfers.
15.29 Although a policy is written under trust, it will not automatically constitute a settlement for IHT purposes (and in most cases, in trusts with an absolute adult beneficiary it will not, as this will not satisfy the definition of a settlement for IHT purposes)[28]. This is important because if there is no settlement then the legal personal representatives are primarily accountable for the tax on the death of a beneficiary whereas, if there is a settlement, the trustees are primarily accountable to the extent of the property which they hold.
The wordings given here may be used for policies issued under the Married Women's Property Act 1882 (where the beneficiaries are those included in the Act), or for policies issued in trust outside the Act. The comments are, however, restricted to the positions in England and Wales. Special mention is then made in relation to the position in Scotland.
The IHT effect on the various trust wordings which follow may be better understood if the nature of the beneficiary's interest is first considered. The following comments are of general application to any fixed trust. The position would be different if the trust was a flexible power of appointment trust created pre-22 March 2006. Generally, an adult beneficiary with a vested or contingent interest in the policy trust will have an interest in possession. This is because section 31(1)(ii) of the Trustee Act 1925 operates, subject to any prior interests, to entitle a beneficiary to the intermediate income arising from his interest once he has attained the age of 18 — unless there is a contrary intention shown in the trust instrument (eg, where a direction is made for income to be accumulated or for it to be paid somewhere else, such as to a charity) or if section 31 is expressly excluded. The income from a minor's interest in a settlement must be accumulated during his minority in so far as it is not used for his maintenance, education or benefit.
Where the beneficiary under the trust is a minor, one of three situations may exist:
(1) The beneficiary may have an interest in possession. This will be the case where, for example, there is a deeming provision which gives the minor immediate entitlement to any income.
(2) The beneficiary may not have an interest in possession but the trust is one which is protected as an accumulation and maintenance settlement within section 71 of the IHTA 1984 (ie broadly a settlement in which no interest in possession subsists but where one or more persons will become entitled to an interest in possession on or before attaining age 25). Thus, the policy trust would be exempt from the lifetime, exit and principal (ten-yearly) tax charges normally applying to settlements without an interest in possession (see Chapter 14, Section 6C). (Note that the income tax consequences of creating an accumulation and maintenance settlement for parental settlors should be considered carefully. If capital or income is generated in excess of £100 it is all treated as the settlor's income[29]. Clearly this taxation consequence will not arise where a life policy is subject to an accumulation and maintenance trust as it is a non-income producing asset).
(3) The beneficiary may not have an interest in possession and the trust is not within the provisions of section 71 of the IHTA 1984 so that the policy trust is subject to the original chargeable transfer, the principal (ten-yearly) charge and the exit charges to IHT.
15.30 The interests of children may be made contingent on attaining a specified age, or on surviving the grantee, or may be limited in such other manner as the settlor desires. Before drafting any trust of a policy which is to be for the benefit of children it is important to determine:
(1) Whether the children are to be named, so that any further children born will be excluded.
(2) Whether, if not named, the class of children is to be limited to the children of the existing marriage or to the legitimate children of the life assured. (A provision for children without further description will include any illegitimate, legitimated or adopted children of the grantee and the children of any marriage.)
(3) Whether any child's interest is to continue for the benefit of his or her estate:
(a) if he or she predeceases the grantee, or dies before the event upon which the sum assured becomes payable;
(b) if he or she dies before attaining the specified age.
15.31 Where an own life policy is effected by a husband or wife for the benefit of the other named spouse, or by one civil partner for the benefit of the other, which is not conditional upon the named spouse/civil partner surviving the grantee, that spouse/civil partner takes an immediate vested interest in the trust of the policy, which on death before the grantee will pass to his or her personal representatives[30] and is unaffected by the grantee remarrying.
If there is no named spouse/civil partner and the trust wording refers to eg 'my wife' or 'my wife immediately before my death' and the wife dies before the husband (who does not remarry), the general view is that the policy moneys would form part of the estate of the husband for IHT purposes[31]. This is so, even if the wife's interest is unconditional upon surviving the husband. If the husband had remarried, and the second wife was alive at the death of the husband, she would be entitled to the policy moneys[32], unless there is an indication to the contrary in the trust instrument[33]. Similarly, if the trust is expressed to be for the benefit of eg 'my widow', the second wife would be entitled to benefit[34].
Where the trust is declared to be for the benefit of a spouse and children, their interest is presumed to be a joint tenancy, unless there appears to be a contrary intention[35].
To avoid repetition in the following comments, no detailed reference is made to the intestacy or succession rules nor to the valuation of a beneficiary's interest in a policy, as both have been dealt with earlier. Similarly, the question of the exemptions available to free a transfer from an IHT charge has already been considered in Chapter 14, Section 4.
15.32 Trust wordings can cater for virtually any scenario desired by the settlor. Some common provisions include:
(1) making the beneficial interest in the capital contingent upon attaining a specified age;
(2) making the beneficial interest contingent upon living at the time the policy moneys becomes payable; and
(3) a per stirpes clause.
Examples of appropriate trust wordings for the above are as follows:
(1) Upon trust for [my son] A absolutely upon attaining the age of [21].
(2) Upon trust for [my son] A absolutely provided that if he should not be living at the occurrence of the event upon which the policy moneys become payable then for [my daughter] B absolutely.
(3) Upon trust for [the Beneficiaries] provided that if any of the Beneficiaries shall die before the occurrence of the event upon which the policy moneys become payable leaving children then such children living on the occurrence of the said event shall take by substitution and if more than one then in equal shares the share which their deceased parent would have taken had he or she been living on the occurrence of the said event.
The trust wordings and their IHT impact are considered in more detail in the following scenarios where the policy is effected in trust for:
(1) named person absolutely;
(2) named persons in equal shares absolutely (their interests to pass to their estates if they predecease the settlor);
(3) such of the grantee's children as survive him or if none survive then for the last to die;
(4) A failing whom B (neither being the grantee);
(5) a person should he survive the grantee otherwise for the grantee;
(6) a person if living at the death of the grantee before maturity of an endowment policy, otherwise for the grantee;
(7) such of A, B, C, and D (none of whom are the grantee) as the grantee shall appoint and failing appointment for D absolutely;
(8) the survivor if any (of husband and wife on a joint lives first death policy), failing whom, the children.
The inheritance tax position of trusts will depend on whether they were effected on or after 22 March 2006 or before that date. If the trust is an absolute trust, in both cases the trust property should be outside the 'relevant property' regime as described in Chapter 14, Section 6C (subject to the comments below about minor beneficiaries). If the trust is a settlement which confers an interest in possession then if effected prior to 22 March it should be outside the relevant property regime but if effected on or after that date it would fall within that regime.
15.33 Draft wording: 'Upon trust for [my son] A absolutely.'
If A is over 18 then the policy trust does not constitute a settlement for IHT (as it does not satisfy the definition of a settlement)[36]. HMRC had previously contested this view if the beneficiary was a minor but they now agree that this does not make any difference. On the death of the grantee, no IHT charge arises unless the grantee was beneficially entitled to the policy at his death, eg if A had predeceased him and the policy had devolved upon the grantee under the will or upon the intestacy of A.
If A predeceased the life assured, there would be a transfer of value on A's death of the open market value[37] of his interest in the policy at that time, which would form part of his taxable estate on death. A's interest in the policy would pass in accordance with his will or the intestacy rules.
15.34 Draft wording: 'Upon trust for [my son] A and [my daughter] B in equal shares absolutely.'
Similar principles as in 15.33. In itself, this wording creates a tenancy in common which means that if A and/or B predecease(s) the life assured then his or her interest in the policy will pass in accordance with their will(s) or the intestacy provisions and, assuming it is an interest in possession trust, a transfer of value occurs of the deceased beneficiary's half-share in the value of the policy at that time.
This form of wording is used, for example, where the grantee wishes to benefit his existing children and there will be no further children (or separate provision is to be made for them). There could be a disadvantage with this wording in that, on the death of a minor beneficiary, his interest in the policy trust passes to the parents, not to the surviving beneficiary. Thus the wording is, perhaps, not wholly suitable for a policy to provide the children with funds to cover the IHT on other assets passing to them under the grantee's will for, in the event of a minor beneficiary's death before the life assured, the parents must transfer to the surviving child (eg by assignment) the interest in the policy which passes to them on the minor beneficiary's death. On the other hand, this form of wording does mean that if a beneficiary who predeceased the life assured is married and has a family then they, and not the surviving beneficiary, could take his interest in the policy. However, this could be covered expressly by a per stirpes clause.
15.35 Draft wording: 'Upon trust for such of my children whenever born [of my marriage to X] as shall be living on the occurrence of the event upon which the policy moneys become payable and if more than one then equally between them Provided that if none of my said children shall be living on the occurrence of the said event then in trust for the last of them to die.'
In view of the changes to the taxation of trusts created by the Finance Act 2006 the concept of the accumulation and maintenance trust for new trusts created on or after 22 March 2006 no longer exists. This wording and comments that follow are therefore included for historical interest only.
This form of trust wording constitutes a settlement for IHT. Furthermore, unless one or more of the children is aged 18 or over, it is a settlement in which, unless the trust instrument expressly provides for it by a deeming provision, there is no interest in possession. However, provided section 31 of the Trustee Act 1925 has not been excluded (either expressly, or by necessary implication) then, as each child attains the age of 18 he or she will become entitled to the income from his or her presumptive share in the settled fund and will, accordingly, then have an interest in possession in a corresponding share of the settlement[38]. Thus, the policy trust constitutes an 'accumulation and maintenance' settlement within section 71 of the IHTA 1984 because one or more of the beneficiaries will become entitled to an interest in possession on or before attaining a specified age (in this case 18) not exceeding 25[39]. It is therefore protected from the harsher IHT treatment for settlements in which there is no interest in possession.
There will be no IHT charge on the death of the grantee unless all the beneficiaries have predeceased him and he has acquired an interest through the will or intestacy of the last of them to die.
If an adult beneficiary predeceases the life assured then a transfer of value occurs because the beneficiary's interest in possession is terminated. IHT will be charged on the proportion of the value of the policy represented by the deceased beneficiary's presumptive share in the settled fund at the time of his death. As a consequence of his death, the presumptive shares of the remaining beneficiaries in the settled policy are increased. If a minor beneficiary predeceases the life assured then, as the beneficiary has no interest in possession, there will be no transfer of value on his death and no IHT will be chargeable. This will be so even if there is an adult beneficiary in existence whose presumptive share is increased as a result of the death of the minor. The death of the last surviving beneficiary will give rise to a transfer of value whether the beneficiary is an adult or a minor at the time.
On the birth of a child to the grantee each existing beneficiary will suffer a reduction in his or her presumptive share, and this will constitute a transfer of value by an adult beneficiary who has an interest in possession which is thereby reduced.
This form of wording (which should be used only if there is at least one child in existence or en ventre sa mere) is suitable where the grantee wishes to benefit by means of life assurance children, including those born after the commencement of the policy, who survive him. The wording is useful, therefore, for policies effected to provide funds for those children who benefit under the grantee's will, to cover the IHT liability.
15.36 Draft wording: 'Upon trust for [my son] A Provided that if he shall not be living on the occurrence of the event upon which the policy moneys become payable then in trust for [my daughter] B absolutely.'
This form of trust wording also constitutes a settlement for IHT.The death of the grantee will not be a transfer of value unless he was beneficially entitled to the policy at the date of his death (see the discussion at 15.28).
On the death of A, during the lifetime of the life assured, B will become entitled absolutely. The termination of his interest in possession will be a transfer of value and IHT will be chargeable on the open market value[40] of the policy at that time.
B's death before A and the life assured will not give rise to a transfer of value as B has only a reversionary interest, which is 'excluded property'[41]. B's death after A but before the life assured's gives rise to a transfer of the open market value of the policy at that time.
This form of wording is principally employed where the grantee wishes to benefit, for example, his children, but with a 'long stop' provision in favour of another (in order to prevent it reverting to himself).
15.37 Draft wording: 'Upon trust for [my son] A Provided that if A shall not be living on the occurrence of the event upon which the policy moneys become payable for me absolutely.'
As stated earlier, such a provision, where a gift is made into trust, and the settlor retains a reversionary interest under the trust does not constitute a gift with reservation of benefit[42].
15.38 Draft wording: 'Upon trust for [my son] A Provided that if I am living at the time the policy moneys become payable or if A shall not be living at my death before the time the policy moneys become payable then in trust for me absolutely.'
15.39 Draft wording: 'Upon the following trusts:
(i) for such of A, B, C and D and in such shares (or wholly to one) as I may by deed or deeds revocable or irrevocable or by will or codicil appoint;
(ii) subject to and in default of any appointment and insofar as any appointment shall not extend or shall fail for any reason then in trust for D absolutely.'
This is a 'flexible', power of appointment trust and constitutes a settlement for IHT purposes. For trusts effected on or after 22 March, see 15.38. For trusts effected before that date, if D is an adult then, unless section 31 of the Trustee Act 1925 is excluded (expressly or impliedly), it is a settlement with an interest in possession because D has a vested defeasible interest and is entitled to the intermediate income arising from the settled property. On the other hand, if D is a minor then, unless there is a deeming provision, there is no interest in possession; moreover, the settlement would not be protected by section 71 of the IHTA 1984 as an accumulation and maintenance settlement, because it cannot be said that a beneficiary will become entitled to an interest in possession on or before attaining a specified age not exceeding 25 (eg an appointment may be made away from D before he was 18 in favour of someone already over 25). It is not sufficient that the power of appointment is not exercised, the terms of the trust must be restricted so they cannot be exercised to prevent at least one beneficiary becoming so entitled.
In practice, most trusts providing for this arrangement contain an income direction, directing that D would be entitled to the intermediate income, thus making it an interest in possession trust. If not, unless D is an adult the policy trust would face the potentially harsher IHT treatment of trusts without interests in possession. (See further, Chapter 14, Section 6C.)
15.40 Assuming this to be the case, then on D's death, or an appointment away from him, there will be a transfer of the value of the policy at that time by D. On the death of A, B or C, before an appointment has been made in their favour, there will be no transfer of value, as they had no interest in possession in the settled policy. On the death of the grantee there will be no transfer of value unless at his death he was beneficially entitled to the policy (eg if it had devolved upon him under the will or intestacy of a beneficiary in whose favour an irrevocable appointment had been made).
The exercise of the power of appointment will give rise to a transfer of value every time an appointment is made to someone who immediately prior to the appointment had no interest in possession. (Thus, in this example, an irrevocable or revocable appointment in favour of A is a transfer of value, but an appointment in favour of D is not[44].)
If an appointment of the whole beneficial interest is made by the grantee in his will then a transfer of value based on the policy proceeds occurs, the rate of tax being determined by reference to the cumulative transfers of the person having the beneficial interest prior to the appointment. For this reason, careful consideration should be given before making an appointment by will.
Despite the problems of possible IHT charges on the exercise of the power of appointment, this form of policy trust prior to 22 March 2006 was often favoured by the grantee who wished to have some flexibility in his choice of ultimate beneficiary, without suffering the potentially higher tax charges of a discretionary trust.
15.41 Draft wording: 'Upon trust for [the children] as shall be living 28 days after the occurrence of the event upon which the policy moneys become payable. Provided that if none of [the children] shall be living 28 days after the occurrence of the said event then for the last of them to die. Provided always if the survivor of us shall be alive on the said event then in trust for the survivor of us absolutely.'
This type of wording is not thought in itself to constitute a gift with reservation of benefit for the same reasoning as expressed at 15.32, namely that the retention of a reversionary interest under the trust is not, in itself, considered to constitute a gift with reservation of benefit.
15.42 Power of appointment interest in possession trusts created before 22 March 2006 will continue to be outside the scope of the regime for 'relevant property' trusts (ie the ten-yearly and exit charges) assuming no appointments are made away from the persons who were default beneficiaries as at 22 March 2006. However, if trustees made appointments away to new beneficiaries before 6 October 2008, those new beneficiaries will be treated as though they were the beneficiaries in existence at 22 March 2006 and the existing IHT treatment will continue. If appointments are made on or after 6 October 2008 and the trust continues, if the appointment away is as a result of the death of the original beneficiary, the value of his or her interest in the trust property will form part of their estate as now, but the trust will then become a 'relevant property' trust. If the appointment was made whilst the original beneficiary was still alive, this would constitute a chargeable lifetime transfer by him or her. Again, the trust would then become a 'relevant property' trust.
Accumulation and maintenance trusts created before 22 March 2006 will continue to be outside the scope of the regime for 'relevant property' trusts only until 6 April 2008 at which point they will become 'relevant property' settlements and the first principal charge will be at the next ten-yearly anniversary from the creation of the settlement (although this will be proportioned as the trust had not contained 'relevant property' for the whole of the ten-year period). The only way of avoiding this is either if the trust provides for the beneficiaries to become absolutely entitled to the trust property at the age of 18 or if the trust could be amended before 6 April 2008 to provide for this to happen.
All trusts created on or after 22 March 2006 which would, in the old regime, have been power of appointment interest in possession trusts or accumulation and maintenance trusts are now treated for inheritance tax purposes as though they were 'relevant property' (ie discretionary) trusts. Thus, gifts into such trusts to the extent that they are in excess of the available exemptions will be chargeable lifetime transfers and the trustees may be liable for the ten-yearly and exit charges in addition, depending on the value of the trust property.
15.43 The rules relating to property rights in Scotland are different from those under English law, as too are the principles of vesting (ie those rules which govern the moment at which the interest in trust property can be said to be acquired). Section 31 of the Trustee Act 1925 does not apply in Scotland, nor is there an equivalent provision in any Scottish statute. Moreover, in the absence of an express direction to the contrary, the general presumption under Scottish law is that any intermediate income arising will not be paid to a beneficiary under a settlement (unless he has an absolute interest), but will be accumulated and form part of the capital.
As a consequence of these differences in trust law, many policy trust wordings which could have been used safely under English law to create settlements with an interest in possession, or accumulation and maintenance settlements within section 71 of the IHTA 1984 would be treated in Scotland as creating settlements without interests in possession and not protected by the section. Such policy trusts would, as a result, be subject to initial, principal (ten-yearly) and exit charges.
It was important, therefore, prior to 22 March 2006, to take care when drafting policy trust wordings for policy trusts subject to Scottish law, so that interests in possession were created at the outset or, alternatively, in the case of trusts for minors, that they were brought within the protection of section 71 as accumulation and maintenance settlements. This was, perhaps, best done by express directions that beneficiaries who were to have interests in possession were given the right to the income arising from the settled property. There should have been clear statements as to when the right to income was to commence, the duration of that right, and what was to happen to the income on the death of a beneficiary under a settlement in which there were successive interests (eg A failing whom B). If an accumulation and maintenance settlement was to be created, then there should have been explicit directions as to when interests were to vest and as to entitlements to income arising thereafter, with clear provisions, for the use or accumulation, of income arising beforehand.
In that way, with care in drafting the appropriate amendments and additions, the policy trust wordings used in England could also have been employed in establishing policy trusts under Scottish law, resulting in similar IHT treatment.
As a result of the changes to the IHT treatment of trusts contained in the Finance Act 2006 and effective from 22 March 2006, the comments contained above are now of only historic interest due to the fact that from that date, all new trusts (except absolute or bare trusts or trusts for the benefit of disabled persons) will effectively be treated as though they were discretionary trusts.
[1] 'Estate' is defined by IHTA 1984, s 5 as the aggregate of all property to which an individual is beneficially entitled (not including excluded property), less liabilities. See Chapter 14.
[2] Capital Transfer Tax (Delivery of Accounts) Regulations 1981, SI 1981/880 (as amended). See Inland Revenue Press Release 14 February 2000.
[3] Supreme Court Act 1981, s 109(1).
[4] [1979] 3 All ER 213; affd [1981] 1 All ER 865, HL.
[5] [1982] STC 267; affd [1984] STC 153, HL. See also Craven v White [1988] STC 476, HL and Fitzwilliam v IRC [1993] STC 502, HL, IRC v McGuckian [1998] STC 908, HL and MacNiven v Westmoreland Investments Ltd [2001] STC 237, HL.
[6] IHTA 1984, ss 8A – 8C
[7] This is because the exit charges before the ten-year anniversary are calculated by reference to the initial value of the trust fund, together with any chargeable transfers made by the settlor in the preceding seven years. If that total does not exceed the nil rate band, no tax is payable. See Chapter 14, Section 6C.
[8] See Chapter 14, Section 6C.
[9] [1999] STC 37.
[10] [2003] STC 822.
[11] Corporation Tax Act 2009, s 54(1)(a).
[12] IHTA 1984, ss 151, 210; SP10/86 (9 July 1986) set out in Appendix 10.
[13] ITTOIA 2005, s 507 and Chapter 13.
[14] See Chapter 14.
[15] See letter dated 6 April 1987 from the Life Insurance Council (LIC) of the ABI to all members of the LIC following clarification from the Inland Revenue, LIC Circular no 60/87.
[16] FA 1986.
[17] Schedule 20, para 5(4).
[18] ITTOIA 2005, s 465 and Chapter 13.
[19] Finance Act 1986, s 102 and Sch 20, para 7.
[20] [1933] 17 TC 432.
[21] [1987] STC 266.
[22] ITTOIA 2005, s 465.
[23] Inland Revenue letter, 18 May 1987.
[24] Note that this is particularly important for trusts for business assurance purposes, in order to avoid with certainty the possibility of a charge to capital gains tax. See further Chapter 17, Section 1A.
[25] IHTA 1984, ss 53, 142.
[26] Within the terms of IHTA 1984, s 71; see Chapter 14, Sections 6B and 6D.
[27] IHTA 1984, s 3A(3).
[28] IHTA 1984, s 43.
[29] ITTOIA 2005, s 629.
[30] Cousins v Sun Life Assurance Society [1933] Ch 126, CA.
[31] Re Collier [1930] 2 Ch 37.
[32] Re Browne's Policy, Browne v Browne [1903] 1 Ch 188.
[33] Re Griffith's Policy [1903] 1 Ch 739.
[34] Re Parker's Policies [1906] 1 Ch 526.
[35] Re Seyton, Seyton v Satterthwaite (1887) 34 Ch D 511; Re Davies' Policy Trusts [1892] 1 Ch 90; Re Browne's Policy, Browne v Browne [1903] 1 Ch 188.
[36] IHTA 1984, s 43.
[37] IHTA 1984, ss 160 and 167(2)(a).
[38] Re Jones Will Trusts, Soames v A-G [1946] 2 All ER 281.
[39] See Statutory Concession F8.
[40] IHTA 1984, ss 160, 167(2)(a).
[41] IHTA 1984, s 48.
[42] Inland Revenue letter, 18 May 1987.
[43] See also Inland Revenue letter from the Life Insurance Council of the Association of British Insurers to members of the LIC after seeking clarification from the Inland Revenue, 21 November 1986.
[44] IHTA 1984, s 53(2).