Last week, I looked at the subject of business insurance, particularly using trusts. My main focus was on the application of the pre-owned assets tax to business trusts under which the settlor can benefit.
In my experience, there are two ways in which a settlor can benefit under a business trust. I looked at one way last week. This is where the settlor is one of the beneficiaries to whom an appointment can be made. Under a business trust, the list of appointees must be confined to participating business owners in order to keep the trust commercial and outside the reservation of benefit provisions.
The other way, which could be combined with this power of appointment, is where the policy benefits are held in the appropriate shares for the other business owners on the death of the life assured but there is a proviso that, should the settlor leave the business (other than on an occasion giving rise to the payment of the sum assured) or dispose of his interest in the business, then the policy benefits will revert automatically to the settlor.
This would be more akin to a contingent reversionary interest under the trust. On the basis that this interest is held absolutely for the settlor, it could be argued that it represents an interest under a bare trust which is not a settlement for the purposes of the provisions in schedule 15 FA 2004. However, a counter-argument would be that as the settlor can influence when he retires or leaves the business, a clean carve-out has not taken place and so the “bare trust for settlor” defence would not be successful.
Given HM Revenue & Customs’ statement that the Poat provisions will apply if the settlor can benefit under the business trust, there would seem to be a high Poat risk attached to business trusts under which the settlor can benefit.
In practice, however, there will be no tax due if the policy has no value or its value is such that the ascertained benefit (at 5 per cent of the policy value currently) is not more than the de minimis limit of 5,000 in a tax year when added to any other ascertained benefits for the settlor under the Poat rules.
It could be argued that a statutory relief should be introduced to give these trusts an exemption from the Poat rules along the lines of that which exempts commercial arrangements from the inheritance tax gift with reservation rules on the basis that:
- Such arrangements have not been entered into deliberately to avoid the gift with reservation rules and should not therefore be within the ambit of the Poat rules.
- These arrangements will not amount to a settlement for income tax purposes because of the lack of bounty provided by each settlor (see CIR v Plummer  STC 793). While it is appreciated that the IHT definition of settlement is used for the purposes of paragraph 8, schedule 15 FA 2004, it seems somewhat anomalous, to say the least, that an arrangement that lacks bounteous intent should be caught by income tax rules that are designed to bite on gifts and other gratuitous transfers.
Despite these possible arguments, it seems clear at the moment that it is HMRC’s view that business trusts under which the settlor may benefit are caught by the Poat.
It is hoped that HMRC will issue further regulations in the future to exempt these arrangements from the Poat charge. In the meantime, advisers should assess each business insurance case individually to ascertain whether a Poat charge is applicable.
For the reasons stated above, it is thought that most policies held in offending trusts will not give rise to a charge. Where, rarely, a charge could arise, consideration will need to be given to what action to take, if any. One course of action may be to exclude the settlor from all benefit under the trust if this is possible.
While on the subject of business insurance and settlor benefit, it is worth mentioning that all the points discussed above will be relevant to policies which provide critical-illness benefits, either on a stand-alone basis or on the earlier of critical illness and death.
Under combination policies effected in a non-business context, it will not be unusual for the policy to be held subject to a trust under which the death benefits are held for beneficiaries while the critical-illness benefits are held for the settlor. Where the purpose of the policy is to provide for business share purchase, regardless of the reason for payment, then a split trust under which the settlor can benefit from the payment on critical illness will not be appropriate.