IHTM20202 - Life Policies: policy on the deceased’s life not connected with any other transaction (except a trust): contracts of life insurance in existence prior to 22 March 2006

The position for life insurance policies written into trust before 22 March 2006 is set out in IHTA84/S46A, and life insurance policies written into trust then falling within S.71, at IHTA84/S46B. Individual’s who exercise an option to increase payments into existing life insurance policies after March 2006 will not create fresh relevant property settlements. If after 6 April 2008 a beneficiary of a life policy dies before the life insured, that beneficiary can be replaced without any impact on the treatment of the trust.

For life policies before 22 March 2006, where there is a change of beneficiary for reasons other than death then, in most situations, a charge would not be triggered. For instance, a change of beneficiary during the period up to 6 April 2008 would not result in a charge. If the policy is held in a pre 22 March 2006 Interest in Possession (IIP) Trust in favour of a spouse with the assets in the trust then going absolutely to their children on the spouse’s death, then adding of a new child to the list of ultimate recipients of the money has no effect on the Inheritance Tax position.

If the policy is held in a pre 22 March 2006 S.71 Trust and the trust allows for new beneficiaries to be introduced, then adding a new beneficiary will not trigger a tax charge. The trust will be treated like all other S.71 Trusts, with no charges provided children take the trust assets absolutely at 18.

If a pre- 22 March 2006 IIP trust was written for the benefit of individuals (direct or in sole names) and a further beneficiary was added after 6 April 2008, then the division of the interest(s) to favour the new beneficiary would be treated as a new settlement. This new settlement would trigger a charge on the amount over the nil rate band.

Section 46A provides for cases where such a policy was, on 22nd March 2006, settled property in which the interest in possession subsisted. As long as the IIP lasts, the policy continues to be treated as property settled before 22nd March 2006.

Where premiums are paid on or after 22nd March 2006 S46A deems those rights settled, and to have become property in which the IIP subsists, before 22nd March 2006.

What if the contract was varied on or after 22nd March 2006? Wherever the provisions of a contract are altered, it is always possible that it is not a variation (the same contract with changes) but is an entirely new contract. Where there is a straightforward variation, you must check that if any new rights arise from the variation they become property comprised in the settlement, and are treated as having been settled before 22nd March 2006. But, this is limited to variations made in exercise of rights conferred by the pre 2006 provisions of the policy or made by the automatic operation of those provisions. In most cases it will be clear that nothing new is settled: if all the rights and benefits under the policy are already settled, it may be the case that any enhancements were settled when the settlement was created. However, new rights may arise not by the variation as such, but when premiums are paid after the variation. Where the changes amount to there being a new contract, either the parties to the policy will have changed or the contract will be fundamentally different.

Section 46A provides protection to the interest in possession that subsisted before 22 March 2006 but also extends to any transitional serial interest that, under the settlement, subsists in the policy

Example

A life insurance policy is written into trust for the benefit of two children (each has a 50% share). Then a third child is born and added to the list of beneficiaries (and each ends up with a 33% share).

  • If this happens before 2006 or before 2008: The two older children each make a transfer to the new child, worth 1/6 of the policy each. This is a PET and so chargeable to Inheritance Tax if they die within 7 years
  • If this happens after April 2008: The two older children each make a transfer to the new child, again worth 1/6 of the policy each. Each of these transfers is now immediately chargeable - but only if over the threshold (£312,000 in 2008).