I have been asked to deal with an estate where the deceased placed a life insurance policy in trust many years ago to help meet IHT.
Premiums of £36,000 per annum have been paid by the family company and included in the deceased’s tax returns as a benefit in kind for the last 7 years.
Will the premiums be treated as gifts by the deceased and need to be included in an IHT403?
Many thanks
A transfer of value by a company is not one by an employee or shareholder but s.94 can apportion it to a shareholder (“participator”). If the premiums were deductible for corporation tax (likely if they were taxed on the deceased as a benefit) s.12(1) will negate the transfer of value. Whether the company is a settlor of the trust under s.44 (by “providing funds”) would depend on whether the funds were paid to the insurance company on a policy vested in the trustees, or in the deceased and later settled, or to the trustees for them to pay the premiums. An addition to an RPT under s.67 can only be made by a chargeable transfer, so not by a CT-deductible payment within s.12
Jack Harper
If these payments were included as benefits from the company then this is effectively income remuneration, similar to pension contributions deducted from salary and paid over to the pension company by the employer. Subject to the other conditions being met, are these not regular payments from surplus income and so do not need to be added back?
Maxine
I agree with Maxine.
Patrick Moroney
Bwl solicitors
Agree with Maxine,
Taxable income, so section 21 IHTA 1984 should apply.
Richard
PFEP
We were told:
a. the “deceased placed a life insurance policy in trust”;
b. “(p)remiums of £36,000 per annum have been paid by the family company”; and
c. “included in the deceased’s tax returns as a benefit in kind”.
We were asked whether these were “gifts by the deceased” for IHT on death and thus form IHT 403.
A “person” can make a transfer of value: s.3. Only an individual can make a chargeable transfer (defined as a transfer by an individual which is not exempt): ss.1 and 2(1).
Logically s21 can only exempt a transfer of value by an individual to prevent its otherwise being chargeable.
So in this case:
1 Who is the individual making the transfer of value which might be chargeable apart from s21;
2 How precisely does he make it if premiums have been paid “by the family company”;
3 To whom do the 3 tests in s.21(1) apply?
We can then examine, if relevant, when we are sure which transferor’s income and expenditure is involved, whether s. 21(1)(b) encompasses income which is a benefit in kind as opposed to being an employer’s payment to a third party by direction of the employee or by way of a discharge of his liability. (And exactly whose liability was it to pay the premiums? See IHTM 20041-5 and Box 4 IHT403)
Under s94(1) a “close company” can make a transfer of value (being a “person” within s.2) which can be “apportioned” (imputed) to a “participator” (not one who is only an employee) but not if it is income taxable on him: s94(2)(a). If it is deductible for corporation tax it is not even a transfer of value, by such a “person”, in the first place: s.12(1).
Questioners here understandably try to save our time and theirs by conciseness but in this instance we do not have enough facts (in my view) to say whether s21 is engaged or how. I have made some guarded assumptions in my earlier comment about other possible implications but tried, and try here too, not to jump to conclusions. Though a regular critic of HMRC I acknowledge that their final analysis of this type of issue will invariably be made on a step by step basis working from the facts and the statute (even on those occasions when I disagree with their conclusions). I expect the same eventually of Counsel instructed on each side and of Judges and it is our best prediction of the latters’ ultimate verdict that our clients need from us.
Jack Harper
I would agree with Jack’s comments.
On the face of it, I am also struggling to see how the premiums could be said to meet the requirement in IHTA 1984, s 21(1)(a) that they were made out of the ‘normal’ expenditure of the transferor’. The ‘expenditure’ (i.e. the premiums) were paid by the company. If the obligation to pay the premiums rested contractually with the family members, it is arguable that this condition has been satisfied, but not otherwise in my view.
Mark McLaughlin
Hi Mark,
The payment is a benefit in kind. The company has not paid the premiums.
This applies to: key person, private medical and shareholder protection polices. And WOL.
The company may pay the premium on the basis is does not claimd it as an expense on the P&L. Against its corporation tax.
The premium paid by the company in terms of benefit in kind is taxable income in his hands.
The general rule is life premiums are not transfers for IHT. S.21 applies.
Maxine is correct in her analysis.
Richard
PFEP
The general rule is that HMRC’s practice is to accept that premiums on a life policy will be accepted by them as constituting a pattern of normal expenditure within s21 often (but not always) commencing with the first payment: IHTM 14242. This is generous as the obligation to pay is rather a loose one since all that happens if payment ceases is that the company does not pay up.
The question is rather, and not yet answered to my satisfaction, is: who is the individual claiming that his transfer of value is eligible for s21 exemption? Only the original questioner can clarify how a payment by a company transmogrifies itself into such a transfer. Richard, who apparently has inside knowledge of the facts, could enlighten us perhaps more than so far.
Jack Harper
The company in my opinion is not paying the premiums. You take a different view.
I can’t respond if your questions continually refer to the company making the payment. If the company is making the payment for what appears to be a gift inter vivos policy – I would doubt the premiums are allowable against corporation tax – even if they own the policy.
Group life, relevant life and polices under BIM45525 are all potentially claimable.
On the assumption the life policy executed is paid from the company account (we would assume this was just bad advice) the accountant has suggested no offset for CT and the payment would be a benefit in kind.
Therefore – the individual being taxed on the premiums as BIK – in my opinion would then qualify for s.21. – in other words life insurance premiums are not gifts for IHT they are an exempt transfer.
Richard
PFEP
The individual being taxed on the benefit as employment income does not of itself cause him to make a transfer of value for IHT.
Sara Bushell in her very brief question said: “Premiums of £36,000 per annum have been paid by the family company”. You say: “The company in my opinion is not paying the premiums. You take a different view.”
It is not my view. It is what we were told.
Deductibility for CT can affect the question under s94 IHTA but only if the the deceased was not just an employee, as he must be for the BIK, but a “participator”.
As Sara does not choose to elucidate the facts given in her question and only Mark McLaughlin has supported me this will be my last post on the topic.
Jack Harper
Thank you all for the time you have taken to consider this matter.
Unfortunately I am still waiting for more information as to the exact basis on which the payments have been made.
Many thanks
Sarah
It is difficult to see how it can be stated that “The company is not paying the premiums” when quite clearly the original poster states “Premiums of £36,000 per annum have been paid by the family company”.
Presumably the reference to “paid” means that the company bore the cost of the premiums ie no reimbursement occurred.
It seems likely the family company qualifies as a close company in which case the payment of the premiums by the company are transfers of value which are apportionable amongst the company’s participators and rank as chargeable lifetime transfers (not PETs) on their part; in fact, the participators are assumed to have made deemed transfers
Such amount as is apportioned to a participator is not capable of reduction under, inter alia, the normal expenditure out of income exemption (s21); the latter only applying to actual transfers of value not deemed ones.
The apportionment provisions are inapplicable where the transfer to the participator is liable to income tax (or corporation tax) on their part as appears to be the situation here (due to giving rise to a BIK).
Expenditure allowable as a tax deduction on the payor’s part does not give rise to a transfer of value.
In short, s21 has no application to amounts apportioned to the participators.
Malcolm Finney
BIM 37745:“The expenditure incurred by a company in remunerating its employees and directors (including the costs of ‘benefits in kind’) is normally allowable. This is because the expenditure is usually incurred wholly and exclusively for the purposes of the trade and is not capital”
An exception would be where statute specifically prohibited a deduction of the type of expenditure.
So s94 (1) is obviated by s12(1).
I agree with Malcolm’s analysis but we are still in the dark about the precise facts as is Sarah the questioner.
Jack Harper