Tax Planning, Tony Wickenden
Last week’s article ended on an uncertain note in connection with the disturbing matter of policy valuation under s167 IHTA 1984 for the purposes of inheritance tax. To recap, s167(1) broadly applies a “not less than premiums paid” provision when valuing a life insurance policy. S167(2) and s167(3) then set out when s167 (1) will not apply.S167(3) disapplies s167(1) if two conditions are satisfied. The first is if the sum assured under the policy becomes payable only if the life assured dies before the end of a specified term and there is no possibility of a surrender or maturity value or both before the expiry of a specified term and during the life of a specified person. The second condition is that if the term of the policy is longer than three years or can be extended beyond three years, the premiums are payable during at least two-thirds of the term and at yearly intervals and the premiums payable in any one period of 12 months are not more than twice the premiums payable in any other period. S167(2)(a) disapplies s167(1) for transfers on death. Section 167(2)(b) does the same where “the transfer of value [which] does not result in the policy or contract ceasing to be part of the transferor’s estate” s167(2) is an anti-avoidance provision. Before the words now in s167(2) were enacted, it was possible to use the words now in s167(1), itself an anti-avoidance provision of sorts, to avoid tax. The scheme by which this result was achieved worked like this. The transferor, A, took out two related policies. The first was a pure endowment policy for which he paid a premium of, say, 50,000. Under this policy, he was to be paid a lump sum on attaining the age of, say, 100, and he had a right to surrender his policy and recover his premium but this right lapsed in seven days. The second policy was a term policy under which the same benefit (the right to which vested from the outset in B) was payable on his death. A typically paid a small premium for the policy. At this stage, A had made a transfer of value of the first premium. The second step was for A to allow his right of surrender to lapse, at which stage s167(1) became important. Under s3(3) IHTA 1984, an omission to exercise a right can constitute a notional disposition and consequently a transfer of value if, inter alia, the omission decreases the value of the estate of the person who omitted to exercise the right in question. By A allowing his right of surrender to lapse, this effect was achieved, since by virtue of that lapse the value shifted out of the pure endowment policy which he owned to the term policy owned by B. Consequently, under s3(3), there was a disposition since the value of A’s estate was decreased and the value of B’s estate was increased. This meant there was a transfer of value by virtue of the provisions of s3(1) and a chargeable transfer by virtue of s2(1). It then became necessary to determine the value transferred by the chargeable transfer. S167(1) provides that, in determining the value of a policy of insurance in connection with a transfer of value, it is necessary to bring into account at least the premiums paid on that policy. The pure endowment policy had the same value both before and after the right to surrender lapsed and, consequently, the value transferred by the chargeable transfer, that is, the difference in the value of the pure endowment policy before and after the omission, was nil. Thus, there was no value transferred by the chargeable transfer when the value actually shifted. S167(2) prevented this value shift from happening. However, there is the small matter of s167(5). As s167 was originally drafted, it did not apply to discretionary trusts. This meant the “not less than premiums paid” rule did not apply for the purpose of the discretionary trust regime. The legislation was therefore amended in Finance Act 1976 to introduce what is now s167(5). With both s167(2) and s167(5) on the statute book, there is an obvious conflict. S167(5) was introduced before s167(2), so one view could be that the later provision would take priority in the event of any conflict. However, another view could be that by leaving the words now represented in s167(5) on the statute book when s167(2) was introduced, the draftsman intended for it to continue to apply. This is understood to be the view taken by the Revenue. The contrary view would be that the disapplication of s167(1) in the more recently introduced s167(2) is clear and it would have been easy to have made it clear that s167(5) continued to apply despite s167(2). Despite all this murkiness, what we can be clear about is the importance of securing clarity on this matter. Just take a post-Budget whole-of-life policy under which premiums of 3000 a month are paid. It is held subject to a discretionary or flexible trust. At the end of 10 years, the life assured is in good health but the policy has no surrender value. If s167(1) applies, the value of the relevant property is 360,000. If it is disapplied, it is nil. Multiple policies subject to separate trusts established on separate days will, under current law, offer some protection against a charge. Despite this, clarity on this matter would be welcome.