Last week, I gave you the news that HMRC Capital Taxes considers that when valuing other than most term policies for the purposes of inheritance tax and, in particular, for the purposes of arriving at the periodic charge under Chapter III of Part III IHTA 1984, section 167(5) prevails over section 167(2). I set out section 167 in its entirety and hope you found this enlightening – if a little dull. Well, what do you expect? It’s legislation, isn’t it? It’s not the Arsenal.That there is even an issue to debate is because of the way in which section 167 in its current form came to pass. As originally enacted, the “not less than premiums paid” rule did not apply to discretionary trusts. An amendment in Finance Act 1976 Sch 14 para 9 provided that references in these provisions to a transfer of value was to be construed as including references to a capital distribution, thereby extending the minimum value rule to discretionary trusts. (This is now section 167(5)). However, the Finance Act 1978, by providing that the minimum valuation provisions did not apply where the policy did not cease to be part of the transferor’s estate, seemed to have removed discretionary trusts from the ambit of the rule because a discretionary trust does not have an estate for the policy to leave. (This is section 167(2)). The possible argument to the contrary, which is the view taken by HMRC Capital Taxes, is that this condition is applicable only where the policy was comprised in a person’s estate before the transfer and, as has most recently been stated to us, “the provisions of section 167(2) do not apply to charges arising under Ch III Part III IHTA”. Policies are excluded from the minimum value rule where the sum assured becomes payable only if the life assured dies before the expiry of a specified term or before the expiry of a specified term and during the life of a specified person. However, if the specified term ends or can be extended to end more than three years after the policy is taken out, and if neither the life assured nor the specified person dies within the specified term, then the minimum value rule will not apply only if : l The premiums are payable during at least two-thirds of that term and at yearly or shorter intervals andl The premiums payable in any one period of 12 months are not more than twice the premiums payable in any other 12-month period. So, for other than most term policies, the HMRC’s view that the “not less than premiums paid” rule applies is an unwelcome state of affairs. It may well be that HMRC’s view, if resisted, does not prevail but a strong counsel of caution, given knowledge of its existence, must be to plan on the basis that it will prevail. For non-term protection plans in non-bare trusts, the “not less than premiums paid” rule introduces another layer of risk that a value may be attributed to trust property at the 10-year anniversary. It is tolerably well known that the risk of a 10-year anniversary charge is tangible if the sum assured is paid and held in trust at the time of the periodic charge. These circumstances could arise if, say, the beneficiaries were quite young when the life assured died. Despite the tax consequences that could arise – and the trustees should at least consider it – the trustees may decide that it is appropriate to continue to hold the sum on trust and not distribute it. Another way in which the trust property could have value is, of course, if the life assured were in serious ill-health. Based on ordinary valuation principles under section 160 IHTA 1984, the policy could have a high value – possibly very close to, but not exceeding, the full sum assured. If, say, premiums of 3,000 a month were paid – admittedly a substantial contract – then a “not less than premiums paid” valuation of 360,000 would be attributed at the time of the periodic charge. Depending on the level of the nil-rate band at the time of the charge and the settlor’s history of cumulative transfers made in the seven years preceding the creation of the trust , this “not less than premiums paid” provision could have an impact. The added property provisions should not cause complications in respect of life policy premiums paid direct to the insurer or within one of the exemptions. As I was at pains to point out in connection with loan trusts, the risk of a periodic charge for a trust established without a chargeable transfer, for example, a loan-only trust or a protection plan in trust funded by an exempt premium, can be reduced significantly or completely avoided with a Rysaffe strategy founded on the establishment of separate policies held on separate trusts established on different days. The implications of the likely application of the “not less than premiums paid” rule are unwelcome, especially given that strategies exist to minimise and, most likely, completely avoid the risk of an IHT charge. However, there really is no reason to let this development stand in the way of setting up protection plans in trust for whatever purpose. The overwhelming utility of such strategies will usually far outweigh any IHT complexity or charge.
Kensington has launched automated valuations and electronic identification as part of its K-net e-com- merce platform. AVMs and e-IDs are free to brokers but packagers are only entitled to free AVMs.
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