TRSM23030 - Types of trust that need to be registered: contents: excluded express trusts: contents: insurance policies and compensation pay-outs

Insurance policies are often ‘written into trust’, which means that the insurance policy itself is held as an asset by a trust. This may be done for a variety of reasons, including estate planning and to ease the distribution of funds following death.

Trusts holding life insurance policies: during the lifetime of the person assured

Trusts of life policies are, subject to certain conditions, excluded from registration as express trusts during the lifetime of the person(s) assured (Sch3A(4)(1) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017).

The policy must only pay out:

• on the death, terminal or critical illness or permanent or temporary disablement of the person assured, or
• to meet the cost of healthcare services provided to the person assured.

The exclusion can apply to trusts holding multiple policies so long as each policy within the trust meets the conditions above. However, where a trust holds any other policy not meeting the above conditions or any other non-insurance assets, the exclusion does not apply.

It is not relevant for the purposes of the exclusion whether a policy is a whole of life policy or a term policy, so long as the conditions above are met.

The exclusion applies to life policies that can pay out for temporary disablement of the person assured, regardless of whether the temporary disablement cover is provided as part of the life policy or as part of a separate policy applied for at the same time as the life cover.

Example

Karl takes out a 40-year term life insurance policy, which is written into trust at commencement. The policy will only pay out on the event of Karl’s death within the 40-year term, and the policy is not able to be surrendered during that term. As this meets the conditions set out above, the trust holding the policy is excluded from registration on the Trust Registration Service (TRS).

Policies with surrender values

Some policies can be surrendered by the policyholder for a cash sum during the term of the policy. The possibility of a policy being surrendered does not in itself mean that a trust holding that policy cannot qualify for the exclusion at Sch3A(4). This is because HMRC accepts that the surrendering of a policy does not ordinarily constitute a pay out from that policy.

The general position is that trusts holding policies with surrender values can remain excluded from registration under Sch3A(4) until such time as the policy is actually surrendered. If a policy is surrendered and the cash sum is retained in the trust, the trust would be required to register from that point.

Example

Iqbal takes out a whole of life insurance policy, which is written into trust at commencement. The policy will only pay out on the event of Iqbal’s death, but the policy is able to be surrendered for a cash value during Iqbal’s lifetime. As this meets the conditions set out above, the trust holding the policy is excluded from registration on TRS.

However, some policies (such as investment bonds) are designed to provide regular or periodic payments to the policyholder in the form of surrenders or part-surrenders during the term of the policy, with a small life assurance element payable on death which is incidental to the benefits provided through the surrenders. In those cases, HMRC’s view is that the withdrawals of cash in the event of a part or full surrender does constitute a pay out from the policy, because those withdrawals are intended from the outset as expected payments of funds from the policy. As this occurs on an occasion other than those listed at Sch3A(4), the exclusion does not apply to trusts holding these policies.

Example

Margaret takes out an investment bond which she places in trust. Under the terms of the policy, Margaret is able to withdraw up to 5% of the funds invested per year in the form of a part-surrender of the policy. As these withdrawals are anticipated as an integral part of the design of the policy, they do constitute pay outs from that policy. As these pay outs are on occasions other than those listed at Sch3A(4), the exclusion from registration on TRS does not apply.

Trusts holding healthcare insurance policies

Trusts of healthcare policies are excluded from registration as express trusts during the term of the policy (Sch3A(4)(2) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017). The exclusion applies where the policy only pays out to meet the cost of healthcare services provided to the person(s) assured.

Trusts holding the benefits payable under a retirement policy

The prospective death benefits payable under a retirement policy are often held in trust during the term of the policy. Trusts holding these benefits are excluded from registration as express trusts during the term of the policy (Sch3A(4)(3) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017).

Trusts holding pay-outs from insurance policies received on the death of the person assured

A trust holding a policy excluded from registration during the life of the person assured continues to be excluded from registration if, following the death of the person assured, the trust receives the pay-out from the policy. (Sch3A(8) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017).

The exclusion applies for two years following the date of death. This gives the trustees two years from the death of the person assured to distribute the funds to the beneficiaries of the trust before registration on TRS is required. If by the end of this period the funds have not yet been distributed to the beneficiaries, the trust is from that point required to register on TRS.

This exclusion only applies if the policy met the conditions for exclusion for registration during the life of the person assured under Sch3A(4).

Example

Grace takes out a whole of life insurance policy which is written into trust. During Grace’s lifetime this trust is excluded from registration under Sch3A(4).

On Grace’s death, the trust receives the pay-out from the policy. The trust remains excluded from registration for up to two years from the date of death under Sch3A(8), giving time for the trustees to direct the pay-out to the beneficiaries of the trust.

Trusts arising from personal injury payment

Trusts arising from personal injury payment are, subject to certain conditions, excluded from registration as express trusts (Sch3A(18) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017).

The trust must derive from payments made to a person as a result of a personal injury to them. The term ‘personal injury’ encompasses physical and mental injuries and includes accidental injuries; injuries due to deliberate or criminal acts; injuries due to clinical negligence and injuries due to industrial disease.

The trust of funds must also be disregarded from capital under regulation 46(2) of, and paragraph 12 of Schedule 10 to, the Income Support (General) Regulations 1987.

This exclusion also applies to trusts arising from personal injury payments in Northern Ireland, provided that the trust of funds is disregarded from capital under the equivalent regulations in Northern Ireland (the Income Support (General) Regulations (Northern Ireland) Regulations 1987).