Is compensation paid for failure to set up insurance trust taxable?

  • Deceased took out a policy with a Bank to pay IHT
  • The Bank failed to set up the trust so proceeds paid to the estate and IHT was paid
  • The PR’s made a complaint and the Bank have offered to compensate the PRs and repay the additional tax paid plus interest

Is this compensation, or a cause of action at the date of death arising from the failure to set up the trust, taxable to IHT?

If so, should the compensation be grossed up to provide for the additional IHT which is payable on the cause of action?

If it is not subject to IHT is it subject to CGT?

Simon Northcott

Although the complaint has been made by the PRs, if there were a cause of action, surely it would be vested in the disappointed beneficiaries, rather than in the estate? The deceased personally lost nothing by failing to establish the trust. If on a proper analysis the cause of action is with the beneficiaries then presumably there is no need for grossing up?

Paul Davies
Clarke Willmott LLP