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It now appears that valuing a life policy placed in trust will need to have regard to the premiums paid

Some of you may recall that, among the plethora of articles I have written on the new inheritance tax trust alignment rules, there was one on how we had been advised by HMRC Capital Taxes that, for the purposes of valuing a policy of life insurance in a trust subject to the discretionary trust regime, it was not necessary to consider the “not less than premiums paid” rule.

This would not be relevant in connection with the entry charge as we would be looking at the amount transferred to the trust – the premium – and in most cases this would be exempt anyway.

The policy value would, however, be relevant in connection with the periodic charge which, in turn, could have an impact for the purposes of the exit charge.

Well, it appears now that this is not the opinion of HMRC Capital Taxes and that, in its view at least, it is necessary to take account of the premiums paid under other than a pure term insurance (which satisfies certain conditions) in arriving at the value of a policy subject to a trust for the purpose of charges arising under Chapter III of Part III IHTA 1984.

This change of heart – if, of course, it is the correct interpretation of section 167 – could have serious repercussions, especially for policies under which significant premiums are paid and even more so where the cumulative total of the chargeable transfers in the seven years preceding creation of the trust was high.

It is certainly an issue which anyone involved with the arranging of life policies in trust, for whatever purpose, cannot afford to ignore. To do so could give rise to a client’s right to complain later if a charge to IHT arises on a 10-year anniversary and they were not told of this possibility and no action to avoid it were taken or planning undertaken. We should remind ourselves of what this whole issue is about. It is particularly relevant to protection plans, of course.

The general valuation rule for IHT in section 160 IHTA 1984 is that the value at any time of any property for the purposes of IHT is the price which the property might reasonably be expected to fetch if sold in the open market at that time. There is, however, a special rule expressed in section 167 IHTA 1984 in respect of life insurance policies.

Given the importance of the valuation of the policy for IHT purposes, I believe it is worth setting out section 167 in full. Understanding it gives one the basis for appreciating why the apparent uncertainty in connection with policy valuation has arisen.”167(1). In determining in connection with a transfer of value the value of a policy of insurance on a person’s life or of a contract for an annuity payable on a person’s death, that value shall be taken to be not less than:

(a) the total of the premiums or other consideration which, at any time before the transfer of value, has been paid under the policy or contract or any policy or contract for which it was directly or indirectly substituted, less(b) any sum which, at any time before the transfer of value, has been paid under, or in consideration for the surrender of any right conferred by, the policy or contract or a policy or contract for which it was directly or indirectly substituted.167(2). Subsection (1) above shall not apply in the case of:

(a) the transfer of value which a person makes on his death, or(b) any other transfer of value which does not result in the policy or contract ceasing to be part of the transferor’s estate.167(3). Subsection (1) above shall not apply where the policy is one(a) under which the sum assured becomes payable only if the person whose life is insured dies before the expiry of a specified term or both before the expiry of a specified term and during the life of a specified person, and(b) which, if that specified term ends, or can, under the policy, be extended so as to end more than three years after the making of the insurance, satisfies the condition that, if neither the person whose life is insured nor the specified person dies before the expiry of the specified term:

(i) the premiums are payable during at least two-thirds of that term and at yearly or shorter intervals, and(ii) the premiums payable in any one period of 12 months are not more than twice the premiums payable in any other such period.167(4). Where the policy is one under which(a) the benefit secured is expressed in units, the value of which is published and subject to fluctuation, and(b) the payment of each premium secured the allocation to the policy of a specified number of such units,

then, if the value, at the time of the transfer of value, of the units allocated to the policy on the payment of premiums is less than the aggregate of what the respective values of those units were at the time of allocation, the value to be taken under subsection (1) above as a minimum shall be reduced by the amount of the difference.167(5). References in subsections (1) and (4) above to a transfer of value shall be construed as including references to an event on which there is a charge to tax under Chapter III of Part III of this Act (apart from section 79), other than an event on which tax is chargeable in respect of the policy or contract by reason only that its value (apart from this section) is reduced.”

Clearly, the general rule is that in valuing a policy of life insurance for IHT under section 167(1), it is necessary to take into account the total of the premiums or other consideration paid for the policy.

The ensuing subsections then proceed to cut down or add further detail to this provision. The main cut downs are in sections 167(2) and 167(3). The most commonly understood and valuable cut down is in section 167(3) which provides that, broadly speaking, the “not less than premiums paid” provision does not apply to term insurance.

I will look at section 167 in more detail next week.

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