IPTM2071 - Beneficiaries under a policy

ICTA88/SCH15/PARAA1 & A5

The annual premium limit applies to beneficiaries under a qualifying policy. An individual is likely to be the beneficial owner if they paid the premium(s) and they (or the estate after the individual’s death) are entitled to any benefits under the policy.

In order for a policy to be a qualifying policy, all rights under the policy must be owned by an individual, or two or more individuals taken together, when it is issued. The policy cannot be a qualifying policy if rights are held by somebody other than an individual (e.g. a corporate) upon issue. See ICTA88/SCH15/PARAB1.

Beneficiaries under a qualifying policy

An individual is a beneficiary under a qualifying policy if they are the beneficial owner of any rights under the policy or any share in rights under the policy.

There are two types of ownership, legal and beneficial, that co-exist in any property:

• the legal owner is the person(s) in whose name the property is held or registered. ‘Legal owner’ includes a trustee or nominee
• the beneficial owner is the person for whose benefit the property is held.

The same person may be both legal owner and beneficial owner of the life insurance policy. This will be the case where an owner of the policy holds it for his own benefit and not as a trustee or nominee for some other person.

There can be a separation of legal and beneficial ownership. In this case the beneficial owner will be the person who enjoys the benefits of the policy even though another person is the legal owner.

Policies held on trust

In order for a policy to be a qualifying policy it must be beneficially owned by one or more individuals. It can however be subsequently assigned into trust.

When a policy is held in a bare trust, the ‘beneficiary under the policy’ is the beneficiary of the bare trust. A bare trust (sometimes called an ‘absolute’ trust) is where the beneficiary or beneficiaries has/have immediate and absolute entitlement to trust capital and income.

Where there is no individual who is the beneficial owner of the rights or any share in the rights under the qualifying policy (i.e. where there is no absolute unfettered or unrestricted right to the policy held in trust) the beneficiary for the purposes of this legislation is the individual who created the trust, known as the settlor.

More than one beneficiary

Where there is more than one beneficial owner of a qualifying policy the premiums payable under the policy will count in full towards each beneficial owner’s premium limit of £3,600. If any of the beneficiaries under the policy breaches the premium limit, the policy is non-qualifying for all beneficiaries. This applies even if other beneficiaries are not in breach of the premium limit.

Example

Sally takes out a life policy under her name making herself and Brian, her husband, the joint beneficiaries under the policy on 10 April 2013. Sally is the legal owner but both Sally and her husband are entitled to the gains that might arise under the policy. They are therefore joint beneficial owners. Premiums payable in any 12 month period total £3,000. This £3,000 will count in full towards both Sally and Brian’s annual premium limit.

In this example, if Brian already paid premiums of £1,000 in a 12 month period under an existing policy that was not a protected policy (see IPTM2072), then he would be in breach of the annual premium limit. The policy he has taken out with Sally will be non-qualifying. The policy will be non-qualifying for Sally, too, although she is not in breach of the annual premium limit.