I am not sure what is meant by an “absolute trust”. If it means owned by the beneficiary absolutely and beneficially, pursuant to the making of a declaration of trust, I agree with Pav’s analysis.
If the policy is transferred to a DT, I agree that the the settlor’s cumulation will be nil and the premiums could be exempt. If the donor died within 7 years, the policy proceeds could be distributed before the first 10 year anniversary free of IHT. This is because under s68 (5) IHTA the rate is nil, as the only relevant components are the setllor’s nil cumulation prior to the commencement of the settlement and the initial settled property, the policy, which has a value of nil. The transformation of the policy into money on the death of the settlor and, if exempt, the premiums are not “additions” to the fund.
If the fund was retained until the first 10 year anniversary it would have available a full nil rate band for the charge at that date under s66 and also on interim distributions in the next 10 years under s69. As the policy pays out £325,000, only capital appreciation would raise the effective rate above nil (assuming the nil rate band is not changed).
If the donor makes a PET of £325,000 before he settles the policy the position is different. If he does not survive 7 years he will have a cumulation of that amount before the settlement commences which will mean the trust charges will be calculated either with no available NRB or, if taht increases, only with the increase. The cumulation of the settlor before the transfer into the settlement affects all subsequent IHT trust charges. It seems arguable that a distribution made before he dies cannot take the eventual failure of the PET into account in determining the rate on it.
If the donor makes the PET after the policy transfer into trust (but not to it) it has no effect on the rate of tax applicable to subsequent trust chargeable events. The order of gifts is thus critical.
Also vital is that the premiums should be exempt so that they are not “additions” to the trust under s67. This could be so even if not first paid into trust for the trustees to pay out but paid direct by the settlor to the insurer. An addition is one that increases the value of the trust property not just one which settles a new asset.
Where a policy has no market value it must surely be arguable that the settlor’s payment of the premiums direct to the insurer does not increase its value: it only maintains it. Payments in to allow the trustees to then discharge the premiums cannot benefit from that argument. An addition within s67 can bring in the settlor’s cumulation in the 7 years before the date of the addition, including the transfer creating the settlement (though nil here) and also any made afterwards (chargeable or failed PET) although not made into the settlement itself.