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Rule intentions

Opposing statements from HMRC have increased confusion over the application of the ‘not less than premiums paid’ rule

I ended last week’s article with confirmation that it appeared to be the view of HMRC Capital Taxes that, when calculating the periodic charge under the discretionary trust regime, the “not less than premiums paid” rule should not be applied. However, it has emerged that a diametrically opposite view has recently been expressed by HMRC Capital Taxes.

Apparently, the latest view is that the existence of section 167(2)(b) IHTA 1984 does not prevent section 167(5) (which itself applies the “not less than premiums paid” rule for the purposes of the discretionary trust regime) applying.

If this latest view is indeed representative of the position that HMRC currently takes and there is no reason – other than the contrary view expressed to Technical Connection – to conclude that it does not, then it would be necessary to apply the “not less than premiums paid” rule in section167(1) when valuing other than most term policies for the purposes of the discretionary trust regime.

Especially for bigger cases, the interpretation adopted could make a significant difference to the periodic charge. Remember, if section 167(1) applies and you do have to use the “not less than premiums paid” valuation rule, the fact that those premiums may have been exempt is irrelevant.

That said, imagine a situation where premiums paid under a substantial whole-of-life protection plan were 30,000 a year. At the first 10-year anniversary, the policy may have no surrender value and the life assured may be in perfectly good health. If section 167(1) applies, then the value of the policy would not be less than 300,000 for inheritance tax purposes.

So why is this issue causing so much confusion? A good place to start would be the legislation, wouldn’t it?

Section 167 states the following: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:

  • 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, lessl 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 :
  • The transfer of value which a person makes on his death orl 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:
  • 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, andl Which, if that specified term ends or can 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:- The premiums are payable during at least two-thirds of that term and at yearly or shorter intervals, and- 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:
  • The benefit secured is expressed in units, the value of which is published and subject to fluctuation, andl The payment of each premium secures 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.

It is not exactly straightforward, is it? There is an obvious conflict between section 167(2) and section 167(5). It is this conflict that has led to the uncertainty over whether the “not less than premiums paid” rule applies for the purposes of ascertaining value in connection with charges under the discretionary trust regime.

I will look at this in more detail next week. You never know, we may have some further clarity from HMRC Capital Taxes by then.


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