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Trustees taking loans from policies held subject to trust

It is well known that where an individual owns a non-qualifying policy and the insurance company makes a loan to the policyholder or arranges for a loan to be made to the policyholder, that loan would be treated as a deemed part surrender of the policy.

However, what was not well known was that this provision only applied in cases where chargeable event gains would be assessed on an individual or on a company in company owned policy cases. And, of course, as outlined in 4 above, where a policy is held in trust and the settlor had died in a previous tax year or was not UK resident then gains would be assessed on UK resident trustees.

The proposed revision ensures that a loan made in the same circumstances will also be treated as a part surrender when trustees are taxable on any gains. Loans taken by trustees in connection with life insurance investments, where the trustees are liable for tax on any gains, will be taxed as if they have made part surrenders of the policy. Where a policy is held on trust and no other person is liable for tax on gains arising from it, the trustees will be liable to tax at the rate applicable to trusts (34%). This measure brings the tax treatment of loans taken by trustees into line with the tax treatment of other policyholders.

In a few cases there may be some doubt about who is taxable on a gain made by a trust when the source of the funds settled on the trust is another trust. The proposed measure will ensure that a gain on a policy held on trusts will be taxable on the trustees if not taxable on any other person.


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