I am dealing with an estate where the deceased owned an AIG life policy. The lives covered are the deceased and his partner. The owners of the policy are also the deceased and his partner. The policy pays out on the first death. The policy was taken out in 2013.
The claim has been accepted by AIG and paid out to the partner without the need for the GoP. She has used it to pay off the mortgage, but she was under no obligation to do so.
AIG has informed me that it does not form part of the deceased’s estate for Inheritance Tax purposes. However, they have not been able to elaborate and tell me why, instead they have pointed me in the direction of HMRC for guidance.
As the property passes to his partner, for her life and his half share almost equates to his NRB, it will determine whether IHT is payable or not.
As far as I am aware, no trust was set up at the time the policy was taken out.
Does anyone have any experience with such policies? Am I missing something obvious or should AIG be able to explain to me the reason(s) why the policy is outside of his estate?
Any guidance would be greatly appreciated.
Harold Bell & Co.
If joint owners are investing on their own behalf, they are
automatically treated as joint tenants, with each of them
treated as holding equal shares in the value of the investment
bond. If one owner dies, the other automatically becomes the
sole owner of the whole investment bond by right of
survivorship. In this situation, the deceased’s share of the value
of the investment bond cannot be disposed of under the terms of
his or her will, or under the intestacy rules. Therefore IHT does not enter into the equation on the first death.
FT Alternative Solutions, Cyprus
I am somewhat perplexed by my reading of Markos O’Shea’s response to Martyn Dixon’s posting.
Whilst Mr O’Shea appears to agree with AIG’s advice, he seems to do so on the basis that as joint property passes by survivorship, it cannot be disposed of by will or under intestacy. Whilst I agree with the later proposition, I do not understand how this takes it outside of the IHT net - I am not aware of any general exclusion or exemption from IHT for property passing by survivorship. To the best of my knowledge, IHT is payable by the survivor in joint account in respect of any such property, although the frequency with which the survivor(s) in joint account recognise their obligation to submit a return to HMRC is perhaps on the low side.
If I have misunderstood Mr O’Shea’s comment, I would be happy if he would be amenable to expanding it to enable me to understand more fully the basis of his view.
In any event, I would be inclined to ask, if he raises the point directly with AIG, that Mr Dixon might share an appropriate extract of the response with this forum.
Thank you both for your messages. Eventually, I spoke with HM Revenue & Customs, as AIG were unable to give me a sufficiently good reason as to why the policy does not form part of the estate for IHT purposes. They confirmed that it does form part of the estate for IHT purposes. I think AIG may have been confused in how the policy operates. It does not form part of the estate for distribution purposes, but does form part of the estate for tax purposes.
Harold Bell & Co.
I am coming a little late into this, where is this policy situated and by what law is it governed?
I should stress that the concept of joint ownership and the mechanisms by which the ius accrescendi functions are different depending upon the law governing the process.
The situation under Jersey law, by way of an example, whether movable or immovable for example, would be such a transfer as Mr O’Shea envisages. But the issue under English law may remain as to whether the joint owners hold in trust for each other, in which case there would be a taxable transfer of one half for IHT purposes. Whilst we are not talking about English land here (!) I would draw Mr O’Shea’s attention to s 36 (1) LPA 1925 where a legal estate -in land- held in joint names “shall be held in trust, in like manner as if the persons beneficially entitled were tenants in common, but not so as to sever their joint tenancy in equity” so that he might detail his position.
The notion of ius accrescendi in the English sense, is heavily reliant upon the trust concept of holding one for the other, and is not the same as it is understood, for example, on the European continent, nor further afield.
Mr O’Shea’s analysis, if applied without more in England, would probably lead to a form of tontine - another question entirely.
The survivor’s reliance upon the law working the transfer automatically - without observing a disclosure requirement to HMRC -in effect amounts to the same thing!
Apologies for the confusion. I wasn’t saying it was not an asset of the deceased’s estate for IHT purposes but that on the basis that the joint policy passed to spouse/civil partner, under the exemption IHT would not apply. I should have clarified this point.
As Martyn says below, AIG will pay out without probate as it is a joint policy
Mark O’Shea .
Was this a life policy or an investment policy?
If it is a pure life assurance policy, my understanding is that ownership will pass to the surviving owner without need for probate.
The value for IHT is the surrender value on the day before death - which may well be £0.