Joint life policy subject to discretionary trust and periodic charges

I’ve been asked to comment on the following situation but I’m unsure which way HMRC would go with this so would be grateful for forum members comments. H&W effect a joint life second death whole of life policy and transfer this to a discretionary trust. Each is contributing half of the premium and are therefore both settlors. IHTA1984/S44(2) means that the IHT legislation will apply as if separate settlements have been created and so 2 NRBs will be available to assess any periodic charges at the 10-year anniversary. Under IHTA1984/S167(1) the value at the 10 year anniversary is the greater of the open market value and the total premiums paid to date. As the policy has no surrender value and H&W are still in good health the value to be used is likely to be the total premiums paid which would logically mean each settlement has a value equal to half of that value for the purposes of calculating the periodic charge. But as the policy is payable on second death, following the first death the whole premium will now be paid by the survivor. Does this mean the value of the settlement for the first to die is now frozen at the total premiums they contributed to their date of death and the value of the survivor’s settlement no increases by the full premium? Or will the total still be split equally?

Ian Smart
Royal London

Hi Ian,

S.167 is only concerned with a valuation – on transfer of value. As you suggest the OMV or premiums paid.

The valuation for 10 year charges is the open or market value - as you suggest if in good health this is typically Nil.

I agree as long as no CLT on either side have been made each have a separate NRB. The premiums paid are covered by s.21 or annual exemption.

Id suggest conflating s.167 with valuing for periodic charges is not the correct approach.

Richard C. Bishop