IHTM20303 - Life Policies: joint life and joint name policies: the situations that can arise and the Inheritance Tax claims that can result

If the joint policyholders are the beneficial owners of the policy (and not merely trustees) difficulties can arise in determining what beneficial interest each has and therefore what claims for tax there are - particularly on the death of the first to die. There are three possibilities:

  • the policyholders are beneficial tenants in common and the interest of the first to die passes under their will.

In this case the share of the first to die forms part of their estate and, subject to exemptions, Inheritance Tax is payable on the value of that share - see IHTM20211.

  • the policyholders are beneficial joint tenants and the interest of the first to die passes to the survivor.

In this case the same consequences will follow. In husband and wife or civil partner (IHTM11032) cases, however, spouse or civil partner exemption will usually be available.

  • the policy created concerted and unseverable contractual arrangements. In other words each policyholder held a separate and distinct item of property (the right to the whole policy if, but only if, they outlived the other).

In this case the interest of the first to die is completely extinguished at that time and does not pass either under the Will or by survivorship. So there is no property to tax on that event.

The case of Murphy v Murphy [2003] EWCA Civ 1862 considered the treatment of a jointly owned term assurance policy which also had a terminal illness benefit. The Court of Appeal determined that the two benefits were held differently and that the intention of the joint owners in obtaining the insurance was the crucial factor is establishing their respective interests in the insurance.

Establishing the interests of a joint owner of a life policy depends on the specific facts of the case. In view of the difficulties that can arise you should seek the early advice of Technical where the position is unclear or where the taxpayer or agent does not accept our view.