I want to place an existing joint life first death policy in trust and include the settlors as potential beneficiaries without falling foul of GWR rules. Where I think there is genuine scope for exploration is whether a bespoke trust can isolate each settlor’s contribution so that the surviving spouse is only ever capable of benefiting from the deceased’s attributable share. If that analysis can be sustained, it might avoid the GWR problem that causes providers to normally exclude the survivor. Does anyone have any experience of whether this can be achieved? Writing new separate life policies is not feasible and 30 day survivorship clauses are not ideal. I have been assured by a law firm we use that it can be done but wanted to get a few second opinions first.
Who owns the policy at the moment? Who has been paying the premiums? What is the market value of the policy? What kind of policy is it?
Jack Harper
Husband and wife. Jointly owned at present. Premiums have been paid from joint account for past 5 years. Term assurance with 18 years left to run.
I’m wondering (also) if a jointly owned policy is beneficially severed first, while the legal title remains joint, has there been any transfer of value at the point of severance? I would guess that severance merely defines the beneficial interests already held by the joint owners, rather than transferring value between them, but I’d be grateful for your view on this as well as the GWR issue.
Yes, this can be done, and I would recommend that the most straightforward solution would be to ask the relevant life office - most now have draft deed wording for such a requirement.
This kind of policy was very popular under estate duty because there was no comparable 100% spouse exemption on the first to die of a married couple. The exemption on the second death was very restrictive.
I am further puzzled by the strategy here. The policy is a term policy and is not written in trust. So on the death of the first life assured within term the proceeds will accrue to the policy owners. If one is the deceased their share of the proceeds will be liable to IHT subject to spouse exemption.
There are indeed sophisticated plans to give away the investment growth of a savings policy without a GROB preserving access to the original investment for the settlor of a trust. But a term policy is simply not that kind of vehicle: it does not produce any such growth.
The easiest way to avoid a GROB is a settlement of the policy interest of each owner on a DT including the spouse as an eligible beneficiary. This is not GROB.
Provided the settlor is not a death’s door the policy will have no or a negligible OMV and s.167(1) IHTA will be excluded by s.167(3). There is a theoretical exposure to future IHT RPT charges but these cannot exceed 6% and frequently the settlor will have a nil cumulation giving the trust a full NRB.
As the means has not yet been devised for a deceased to enjoy life policy proceeds payable on his own death, giving away such a policy is scarcely detrimental. As a DT beneficiary of the other settlor he can be appointed all or part of the proceeds payable on the death of the other life assured if they die first.
I feel as if I must be missing something monumentally spectacular here and stand to be instructed in my apparent ignorance.
Jack Harper
I should have made my initial reply somewhat more comprehensive.
Life offices are offering draft trust wording for joint life 1st death events. They do tend to include a 30-day survivorship clause (although this could be removed). However, they are also quick to point out that this may not be effective for IHT.
From a financial planning perspective, I am not sure why such a policy needs a trust, given the survivor gets the proceeds automatically without the need for probate (although the life office may still ‘insist’ on this - they do have their quirks), so I have not been able to understand the true benefit.
I can see why placing a large sum assured in a survivor’s estate may be unhelpful. However, if this was going to be the case, then it seems to me that it is far more likely that the cover was inappropriately arranged or that the cover was not really required.
I was right it seems that any useful answer would require a deeper understanding of what the clients are seeking to achieve and how this component fits into it.
There are good reasons why a sum might be wanted on the first death e.g. to provide for the children of the first to die in a second marriage. But it seems an own goal because a gift by Will to them would use up NRB as a minimum. This can so easily be avoided if the policy is settled on a DT especially if the settlor has a nil cumulation. In fact I would go so far as to say that an adviser who did not suggest that might one day have to write the dreaded letter to insurers if there was no disclaimer about tax advice on the policy
Jack Harper
Richard, Jack — apologies for going quiet after my initial post; I’ve been away and am only now catching up with the thread. Thank you both for taking the time to respond.
I think I may have been too brief in setting out what I’m trying to achieve, and Jack’s last message suggests he’s sensed there’s more to it — he’s right.
The clients’ position is this: they have a £1m JLFD term policy primarily intended to clear a mortgage of £825k, but with a meaningful surplus above that. Their wish is to keep their options open. If the survivor’s financial position allows it, they would like the surplus — and potentially even the mortgage repayment portion — to remain available for other beneficiaries (in practice, their daughter). But they can’t commit to that at outset, because they don’t yet know what their circumstances will look like at the point of claim.
So the objective isn’t simply to ensure the survivor gets the money — it’s to include the survivor as a potential discretionary beneficiary alongside the daughter, without the whole fund passing automatically and irrevocably into the survivor’s estate on first death.
The further point — and this is really the nub of it — is that if the survivor does need to draw on the trust fund, we would prefer the trustees to lend those funds to the survivor rather than appoint them outright. A properly documented loan from the trust to the survivor, used to discharge the mortgage, creates a debt against the survivor’s estate. That debt should then be deductible for IHT purposes on the survivor’s later death, keeping the capital (or its equivalent) effectively outside the survivor’s taxable estate while still meeting their practical need at the time of the first death.
Jack’s point about each settlor settling their own beneficial share on a DT — with the other spouse as an eligible discretionary beneficiary — is precisely the architecture I had in mind, and it’s reassuring to see that confirmed. The GWR point resolves neatly on that basis: the survivor is benefiting from a trust settled by the deceased, not their own trust, so there’s no reservation of benefit issue. Richard, I appreciate the pointer to life office draft wording — that’s useful to know, though given the specific loan-back objective, a bespoke deed is probably the cleaner route here.
I’d welcome any further thoughts, on whether the loan-back / IHT debt mechanism is one either of you have seen used effectively in this context.
Stephen
I presume each settlor’s cumulation and the TOV arising from the transfer of their policy interest to a DT will be within their available NRB. Each TOV will be a CLT. Related property will apply so the value transferred in each case will be 50% of the current open market value of the policy, applying s.167 IHTA if in point, without discount for a part interest.
I presume that the mortgage is secured on a property but that the policy is not also similarly secured.
Is there not a practical obstacle? Each trust will own half of the policy but to avoid a GROB each settlor must be excluded as a beneficiary from his or her own trust. On the first death half of the policy proceeds will be payable to each trust but the survivor will only be an eligible beneficiary of one of them because being excluded from their own. A distribution cannot be made from the survivor’s trust to a deceased beneficiary. The mortgage is presumably joint and several so that the survivor will become liable to repay the entire balance outstanding but only be eligible to receive a distribution from the deceased’s trust.
A loan can be made to a beneficiary provided the trustees have a clear power to lend on any terms e.g. interest-free without security and even repayable on demand. A demand loan will prevent an IHT RPT exit charge but be theoretically uncomfortable for the borrower. The trustees can protect themselves by making a distribution to the borrower and setting off the receivable. A fixed loan interest-free or on below market terms will cause an exit charge. The rate may be 0% of course.
A loan at a full market rate of interest avoids an exit charge but is tax-inefficient, taxable on the trustees non-deductible to the borrower. The trustees may be able to mitigate the cost by distributing income to beneficiaries taxable at nil or a lower rate but it is not a very attractive plan.
A loan from the trust from which the settlor is excluded from being a beneficiary would be a breach of trust unless made on full market terms under a very clear specific power. But even such a loan is caught by s.633 ITTOIA as a capital sum paid to the settlor and makes them liable to tax on any undistributed trust income, so mitigable if tax-efficient to distribute it all or if the settlor’s liability is less than that of the trustees! Such a loan would not be a benefit creating a GROB but the market rate terms must be spot on because any benefit at all creates a GROB of the whole trust fund. Decidedly risky. It may be better to lend to a beneficiary like the daughter for her to lend on or for the settlor to use his or her other funds to repay.
The loan should be deductible. In particular s.103 FA1986 should not apply because the disallowance or abatement of the deduction does not seem to apply where the borrowing is from a trust settled by someone else unless, perhaps, if the trust was funded by assets previously transferred by the deceased borrower to the settlor, whether by exempt transfer to a spouse at the time or not. Borrowing from your own trust seems caught if not by the section than possibly by the GAAR but it is uncharted waters. Channelling funds through a trust may be a disposition “in concert or by arrangement” with trustees and “directly or indirectly….. whether by one or more intermediate dispositions” in s103 (3).
IHTM28361-70 has no examples involving trusts. They all involve an individual A making a gift to another B and A borrowing from B. But in 28367 there is an odd reference to the “deceased” (A in my own example) having “settled the property” presumably on B. Though the paragraph is directed at whether income from the relevant property is also counted.
To make matters worse the repayment of a borrowing caught by s.103 is a PET!
Borrowing from the trust made by first to die seems outside the section provided the second to die, the borrower, did not make any lifetime gifts to the other settlor spouse. Borrowing from your own trust can only be caught if the required earlier lifetime transfer can include one made not to another individual but to a trust which you yourself settled: I think the section can be so interpreted but whether HMRC do is just not in the public domain so, worst view, assume they do.
As to your drafting, I do not like to speculate as to whether Claude is thereby contumaciously undertaking a reserved activity though you are if you are not an authorised person. I am no longer allowed to, having been voluntarily defrocked, but even if I still were I fear my inventory of bargepoles would not contain one of adequate length. The Forum is, I fear, “non conveniens“ for such granular hands-on collaboration.
Jack Harper
Jack — thank you again, your analysis is, as ever, meticulous and I want to engage with the key structural points you raise before I close this thread out.
On the half-proceeds problem — you are of course right, and I had not thought through the arithmetic carefully enough. With a £825k mortgage against a £1m policy splitting 50/50 into two trusts, the survivor has clean access to only £500k from the deceased’s trust. The remaining £325k sits in the survivor’s own trust from which they must be excluded to avoid a GROB. The daughter-as-conduit route seems the least unattractive solution for the shortfall — a distribution to her from the survivor’s own trust, with her lending on to the survivor — but I take your point that this adds a layer of complexity and dependency and needs to be explicit in the Letter of Wishes and understood by the daughter.
On the loan structure, your hierarchy is helpful. The demand loan route seems the most defensible provided the deed contains a sufficiently clear power and the trustees exercise it properly — though your point about the deferral of demand potentially constituting a concessionary term and triggering an exit charge is something I had not considered and will need specific legal advice on.
On s.103 FA 1986 — your analysis is reassuring on the borrowing-from-the-deceased’s-trust point, subject to confirmation that neither spouse has made qualifying lifetime gifts to the other. That is a factual matter I can address with the clients.
On your closing point about reserved activities — I should clarify that my intention was never to draft the deed myself or to present a working document to the clients. What I prepared was a structured remit and annotated brief for a firm of solicitors who have already indicated they can prepare a document that achieves the planning objective. I wanted the brief to be as technically complete as possible so that the lawyers are reviewing and refining rather than starting from scratch.
Thank you for the benefit of your expertise throughout this thread.
Stephen
There are two issues of possible future assistance to trustees in this kind of situation and a confirmatory antecedent written non-binding record of the family’s strategic plan signed and dated by parents and daughter would have some potential evidential value. It could be referred to and annexed to a non-binding LOW made by each settlor.
1 An eligible beneficiary of a DT only has a right of action to seek to compel due administration. Who apart from the daughter is likely to complain? Each trust could even label her as the “Primary” eligible beneficiary. Of no legal significance at all but evidentially highly tendentious. If she is happy with the trustees’ decisions what weight would a judge attribute to the challenge of some other disgruntled eligible beneficiary chancer?
2 A LOW can and must be explicitly non-binding so as not to become integrated with the binding trust provisions. Trustees are not bound to slavishly follow the wishes of the settlor but, where these are starkly evidenced, trustee decisions that are faithful to those wishes are that much more difficult for peeved eligible beneficiary chancers to demonstrate as being the product of inadequate deliberation.
I am glad you have a pukka trust drafting sanitisation strategy. It is absurd that any old charlatan can draft a trust in a Will but not in a deed whereas someone who has demonstrable expertise cannot do the latter without having closed shop credentials. I had to outsource my reserved activities to mates who then engaged me to carry them out under their umbrella, relying on my indisputable expertise and their personal trust in me. I once had a legal partner, a long qualified solicitor, with whom I had a great rapport but whom I accused of using precedents which seemingly he had obtained from Exchange & Mart or Dalton’s Weekly.
This response has not been compiled by use of AI.
Jack Harper