Premiums on whole-of-life policies in trust

Trusts Discussion
1

A quick sense-check for the group, if I may.

I have encountered the suggestion — from other professionals — that premiums paid on a whole-of-life policy “written into trust” are not transfers of value because “there’s no trust until the person dies.” The argument is that the policyholder is simply paying an insurance company, and the trust only crystallises on death when the policy pays out.

My understanding is that this is wrong: the trust is constituted when the deed is executed at policy inception, the policy is the trust property from that point, and each premium is a transfer of value under s.3(1), a CLT for discretionary trusts. The s.21 normal expenditure exemption is the standard relief.

I’m confident in the position but curious whether anyone has encountered this misconception, or whether HMRC has ever accepted the “no trust until death” argument in any context.

Thanks in advance for your views.

Gary Tonsley

2

Assuming that the trust is validly constituted and excludes the settlor then, as you say, each premium paid is a transfer of value. To illustrate this, a whole life policy acquires a surrender value and the trustees could encash it at any point prior to the assured’s death, so that’s a clear example of value accruing outside the settlor’s estate.

3

The important question is who owns the equitable interest in the policy when the premium is paid.

1 The settlor owns the policy and pays a premium

His estate is either not reduced, so no TOV, or, if the policy value after payment of the premium is not increased by the same or a greater amount than that of the premium paid, s.10 will negate any TOV.

2 The settlor settles the policy owned by him on trust (after paying one or more premiums or before paying any)

The policy becomes trust property. A lifetime trust must be an RPT for IHT and so outside his estate unless the trusts are such that a GROB arises.

The lifetime transfer into settlement is gratuitous so a TOV and s.167 can apply to determine the value transferred. That section only applies to a transfer of the policy not to subsequent payment of premiums.

The TOV will be a CLT unless and to the extent that the annual exemption applies subject to NRB; even if there is a GROB although double charge relief should apply.

The RPT IHT exit and anniversary charges will apply dependent on the value chargeable, by reference to the market value of the policy, which may be modest if not a savings policy (and s.167 does not apply to those chargeable events).

Of course paying premiums may increase that value. If exempt s.67(1) will avoid an addition and s.67(2) may do so if the policy is not a savings policy.

The death of the settlor of a lifetime trust has no effect on whether the policy trust attaches to the policy. The timing of that depends on the standard rules for ascertaining whether and when a trust exists and the nature of the trust property.

Either the trust property owned by him must be transferred by the settlor to the trustees of an existing trust or a declaration of trust must be made by the settlor over property owned by him or to which he may become entitled (if clearly described and the trust will then take effect if and when it he becomes entitled to it). Routinely a new policy destined for a trust will be issued directly to trustees (often on trusts in standard form, plus or minus some customisation, after the settlor has paid the first premium or the trustees have done so with money settled on them by him). Of course a settlor may be issued with the policy and then later transfer it to trustees of a trust, existing or newly executed, or by a DOT over it.

Jack Harper