I am considering putting my married client’s single life term assurance policy into trust. A previous adviser set it up many years ago but did not put it in trust. Normally, the transfer of value into trust would be zero of course, but our client is now thankfully “all clear” from cancer, so not as straightforward as someone who has not had a life threatening illness. If he passes away in the next two years, I am concerned that HMRC will consider that the proposed transfer into trust was a CLT. How can I find out from HMRC if this is likely to be the case? I know that to be eligible for a serious ill heath lump sum from a pension scheme one needs to have a medical professional confirm a life expectancy of less than one year (that’s not the case here). That is quite prescriptive, but I am struggling to find guidance for the scenario I am dealing with. The benefits of the policy going into trust are significant, but if the transfer is caught as a CLT if he dies within two years, the significant sum assured may be liable to IHT even if it is transferred to his wife. I have contacted GAD but I do not know when then will reply, or even if they are the right department. Thank you.
Hello,
I’m not aware of any market that would buy the policy you have outlined. Therefore I’d suggest the MV is very low or Nil!
That aside. Why not use a pilot trust structure? The CLT problem goes away.
Richard C. Bishop
PFEP
The open market value rule simply does not work like that. A mandatory assumption is that the actual asset would be bought by someone. Difficulty of resale is a factor that would affect the price. Anyway, surely the policy is assignable which means an hypothetical willing buyer can be posited even if there is no ready market. Actuaries can work it out as they do for a life interest which though assignable has no ready market either. Although the market for policies may be ad hoc unlike the stock or commodity exchanges, because a policy is not fungible but unique to the life assured and its precise terms, it is still a market.
I don’t see how a pilot trust works. That is designed to hold assets after death like a pension fund lump sum which is not taxed in the death estate (before October 30!) due to its discretionary nature. The owner of the policy here will be taxed on his death on the policy proceeds (I assume he is the life assured), so to take advantage of whatever discount is appropriate due to his impaired life, if such it is, he needs to make a CLT into trust now. You presumably have his NRB plus 7 years survival in mind. In order not to overshoot you prudently need medical advice and an actuary. You might then even decide to assign only a part share of the policy into trust; that must needs be equitable so a DOT is perhaps better though registrable on TRS. I assume a PET is not on as there is no suitable individual transferee.
3 other points:
1 If the owner is not the life assured then market value is taxable on his death before the policy pays out.
2 A lifetime transfer may be affected by the floor valuation of s 167 IHTA which can affect term policies.
3 A policy under s11 MWPA 1882 is held in statutory trust from the outset and will attract the spouse exemption if the life assured owner dies first.
Jack Harper
Pilot Trusts
“The owner of the policy here will be taxed on his death on the policy proceeds” is not accurate.
- The beneficiary of the pilot trust would be his wife? The first £325,000 could covered by the NRB. The OP has not stated the value.
- At worst £325,000 could be carved out and settled without the need to use a full CLT on the basis the estate is going to the spouse.
Malcolm wrote an informative article on the subject -
Pilot Trusts: Dead Or Alive? - Tax Insider
OMV - I don’t agree with your analysis, it’s a pure life product and I’d suggest providers would not allow third parties to be involved, the question of insurable interest would arise. I’d suggest IHTM09771 could apply.
I would accept with a carve out policy that has some element of investment then a sale could be executed. The 2nd-hand endowment market is not where this policy sits.
Richard C. Bishop
PFEP
If the policy is on the policyholder’s own life then there is no insurable interest issue and he is free to assign, mortgage, put it in trust or whatever.
1 If an individual owns a policy on his own life, it is part of his taxable estate. On his death it and so the policy proceeds become part of his death estate. If he makes a lifetime gift of to his wife or by his Will it is an exempt transfer as it becomes comprised in her estate: s18 IHTA. If he leaves it to a pilot trust it is NOT exempt unless s144(2) is triggered by an outright gift to the surviving spouse within the 3 month time period. Malcolm’s article does not mention this at all. It deals with other uses of a pilot trust e.g. multiple NRBs. Those uses do not primarily operate on the basis that s144 will be used but it is a useful safety valve if an appointment to others turns out to be unsuitable or imossibe i.e. there is no surviving spouse.
Pension lump sums are already held on a DT and are not taxable on the pensioner’s death; so pilot trusts are useful to bypass the surviving spouse’s estate altogether (so no need for her to make a lifetime gift of the proceeds or be taxable on them at her death) and they go directly into a pilot trust and the IHT RPT regime.
2 A pure life term policy is in principle fully assignable as a matter of law. This is not a matter of opinion. I have never seen a life policy which is made contractually non-assignable. They are frequently assigned by way of security. If a policy is non-assignable it cannot be put into trust and it frequently is. Providers are totally OK with “third parties getting involved” as they offer standard trust wordings so a policy can be issued to trustees or assigned to them later. They are of course entitled only to pay out the original policyholder unless notice is given to them of the assignment.
3 I have no idea what the reference to IHTM09771 is meant to tell us.
4 On OMV:
"SVM113020 - The Statutory Open Market: General Comments on the Statutory Hypothesis
The case of IRC v Gray [1994] STC 360 contains an authoritative re-statement of the statutory hypothesis. In that case, Hoffman LJ [ as he then was] said:“Certain things are necessarily entailed by the statutory hypothesis. The property must be assumed to have been capable of sale in the open market, even if in fact it was inherently unassignable or held subject to restrictions on sale."
To say that OMV is not applicable because there is no market in fact is diametrically opposed to the true legal position and so much so that it is a schoolboy error. Yes, "even if in fact it was inherently unassignable or held subject to restrictions on sale". The statutory hypothesis demands the assumption of a fictional willing buyer.
5 Richard, you seem determined with your posts on here to argue the technically incorrect. This must be confusing to some Forum members. It gets tedious responding so that they do not get confused.
Jack Harper
Hi Jack,
You simply make assumptions without any evidence.
“A pure life term policy is in principle fully assignable as a matter of law” - for monies worth? Can you produce any evidence from a “provider” this assumption is correct?
A pure life policy will only have a “value” if the life-assured is terminally ill - the OP has referenced this and he is correct.
As Malcolm’s comments:
"Settling life assurance policies on lifetime pilot trusts may be particularly advantageous (e.g. instead of settling a £1 million life insurance policy on one trust, four separate policies each of £250,000 are settled on four separate pilot trusts). Consideration might also be given to pension death benefits out of trust-based pension schemes.
I agree with Malcolm.
“Richard, you seem determined with your posts on here to argue the technically incorrect. This must be confusing to some Forum members. It gets tedious responding so that they do not get confused”.
You mean by posting the view of acknowledged tax expert?
If anyone is confusing matters "“The owner of the policy here will be taxed on his death on the policy proceeds” - No he won’t! Complete nonsense.
Richard C. Bishop
PFEP
Can you evidence this please? It would be a very useful tool if you’re correct?
Richard C. Bishop
Can you post any evidence to the contrary? It’s always been my understanding that pure-life (un-convertible) cannot be sold (assigned) for money.
The undisputed fact that HMRC definition of market value means we MUST pretend a willing buyer and willing seller exist in an unfettered market without restriction - does not mean - the item (in this case a life-policy) must have a value.
From Royal London - What is life insurance? - Royal London
Thank you for all your responses, particularly Richard and Jack. I do appreciate the input.
1 The assignability of a life policy is governed by statute. The Policies of Assurance Act 1867, still in force
https://www.legislation.gov.uk/ukpga/Vict/30-31/144#:~:text=Any%20person%20or%20corporation%20now,liable%20under%20such%20policy%20for
“S.1 Assignees of life policies may sue in their own names. Any person or corporation now being or hereafter becoming entitled, by assignment or other derivative title, to a policy of life assurance, and possessing at the time of action brought the right in equity to receive and the right to give an effectual discharge to the assurance company liable under such policy for monies thereby assured or secured, shall be at liberty to sue at law in the name of such person or corporation to recover such monies.” S.3 requires notice to the insurer.
2 A life policy is an intangible, traditionally a “chose in action”. It is thus within s136 LPA 1925https://www.legislation.gov.uk/ukpga/Geo5/15-16/20/section/136/data.pdf The two statutes largely overlap.
3 The assignability of intangibles, and their creation and legal characteristics, is a matter of substantive law, the law of personal property, statute and case law… It is also a branch of contract law because of assignment of contractual rights. It is not a matter of “evidence” but “evidence”, Richard, may be found in Big Boys’ Books like Chitty on Contracts, Bridge and others on Personal Property. and McGillivray on Insurance law. Not in “Janet and John assign a policy”. I practised as a company commercial and private client solicitor with a specialisation in tax, so I know about these things. I covered them in 1966-69 in my Cambridge law degree.
4 In theory an insurer could make a life policy non-assignable but that might be contrary to public policy. There is much law on non-assignment clauses generally in contracts. These can be overridden by a declaration of trust. It is a moot point whether a clause also prohibiting that would be enforceable in a particular case.
5 The original party or the assignee must have an insurable interest. Trustees will not unless the settlor owes them money. An individual always has an insurable interest in his own life so the policy is issued to him initially and he then assigns it or does a DOT. You say: “The owner of the policy here will be taxed on his death on the policy proceeds” is not accurate." If a policy owner dies owning the policy he will be. To assert the contrary is simply wrong. He makes a lifetime gift outright or into trust to avoid that. You also say:“The CLT problem goes away”. The lifetime transfer into trust is a CLT and the main objective is to have a low value for the TOV plus ideally a zero cumulation and annual exemptions.
6 I do not want to criticise Malcolm on semantics but I view a “pilot trust” as a lifetime trust designed to last for some time and receive assets on the settlor’s death. In his example the "pilot trusts2 last for only a short time as such. They are created and funded over a short period of succesive days to avoid “related settlements” and “same day additions” for IHT. And here is the absurdity of your argument. The life policy or policies have to be transferred by the settlor, with the insurable interest, into the trusts either by an assignment or a DOT. If they were legally non-assignable, they could not be assigned in the real world outside OMV but they will and must be assignable. A DOT is useful for a single policy as assigning a part of a policy has to be equitable because it is not “absolute” within s136, so for 4 trusts you need 4 DOTs. Policies are usually written in cluster so there can be four sub-policies each with a separate designatory letter.
7 Outside the real word and through the looking glass with Alice into OMV. The hypothetical willing buyer will take into account the actual state of health of the life assured as it affects the value of the actual asset to be valued (the only real component in the doctrine). The hypothetical willing seller must be regarded as disclosing it under s168 IHTA. OMV is 95% based on case law so I regard myself a competent to advise on its principles but always left the specific pure valuation advice to specialist valuers, including on IP. brands, racehorses, woodlands and yachts.
8 You self-designate as an “acknowledged tax expert”. I might be considered as one and I leave members of this Forum to judge our respective contributions in that context. I became an FCA in 1972, a solicitor in 1976, and a Fellow of the Institute of Tax in 1979 (by thesis on stamp duty). I have been at it for 50 years without a claim. Given your assertion as an expert and because this is a public forum, so accessed not only by professionals, I regard it as an obligation to correct contributions that are terse, glib, misguided, wrong, persisted in nonetheless, and with potentially dangerous consequences akin to those of the proverbial precipitate excursion into the China Shop. I will go on doing so.
Jack Harper
Hi Jack.
“You mean by posting the view of acknowledged tax expert”? - I’m referring to Malcolm - Not me! I’ll ignore the additional ad hominem comments.
I’m more than happy to be corrected. This “forum” is a discussion - and everyone is due an opinion on any given question. I’m not sure how why you feel there is one definitive answer! I may ask 3 lawyers weekly a view on a problem and get 3 different answers back - much the same with accountants.
- I don’t think a provider will allow the assignment of a pure life policy to a buyer of a policy. Who pays the premium for example?. I’d argue as I did - if the policy is assigned to (y) Ltd and they pay the premium then insurable interest must be in question! (See Royal London).
- I do agree they will allow assignment of the benefits.
- I agreed on my original post that life insurance polices can be assigned - I have not suggested they cannot. (I would accept with a carve out policy that has some element of investment then a sale could be executed. The 2nd-hand endowment market is not where this policy sits).
- I don’t agree that “pilot trusts” with a NRB available have no place in estate planning in terms of life insurance. (See Malcolm’s comments - “view of acknowledged tax expert”)
- I don’t agree your interpretation that a PL with a full NRB will be taxed if the life policy is paid into the trust.
- A pure-life policy will ever have any value (unless the life-assured has a terminal illness). If that’s the case the provider will pay out the policy anyway.
That’s my position. You have a different opinion.
Richard C. Bishop
You always want the last word and have unshakeable confidence in your opinions, without seeming to have the technical knowledge to support them. My experience of IFAs is that the I stands for “I know”. If your opinions are delivered to your clients as you articulate them here then good luck to them and your PI policy. The statutes make any policy assignable unless the insurer provides to the contrary. A DOT will get round that. If that is excluded also it cannot be put into trust. It may be wiser sometimes to say nothing and be thought foolish than to speak and put the matter beyond.
Jack Harper
“Unshakeable confidence in your opinions” - I’d agree and all given without any need for personal attacks on others.
Richard C. Bishop
I suppose it’s a bit like trying to prove a negative! But being a ‘chose in action’ it can generally be dealt with in any way the owner sees fit. I do recall some older policies contained a non-assignability clause but I didn’t see any such clauses in any new policies post 1984 (but that’s not to say they don’t exist!).
The case of Dalby v India & London Life Co. confirmed that insurable interest need only exist at the time the policy is effected.
Regards
Hi Robert,
Assignment of a pure life policy occurs every day, in terms of the benefits and as you suggest there are no clauses preventing this action. Bulk assignment of life polices to another financial services provider occurs on a regular basis.
The question here is assignment of the “policy” to a third party for monies worth, in other words I take my £100,000 10 year term policy with no investment element (and I’m not terminally ill) and sell it to a third party. This would require the provider of the policy for example: Legal & General to agree the assignment we’d assume by some sort of declaration.
I agree with you this situation never occurs (never say never), so we are trying to prove a negative - I have no idea why! I can only resort to experience and opinion (which is open to a contrary opinion).
Agree on Dalby v India & London Life Co - again back in the land of proving negatives - if the event could occur and the “new” policy owner wished to amend the policy would the interest be questioned - again only an opinion.
Richard C. Bishop
“This would require the provider of the policy for example: Legal & General to agree the assignment we’d assume by some sort of declaration.”
This is not an opinion. This is a statement of what the law is, and is fundamentally wrong, coupled with an assumption, which is equally erroneous. Here is the law on legal assignments in LPA 1925:
136 Legal assignments of things in action.
(1)Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal thing in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to claim such debt or thing in action, is effectual in law (subject to equities having priority over the right of the assignee) to pass and transfer from the date of such notice—
(a) the legal right to such debt or thing in action;
(b) all legal and other remedies for the same; and
(c) the power to give a good discharge for the same without the concurrence of the assignor:
Provided that, if the debtor, trustee or other person liable in respect of such debt or thing in action has notice—
(a) that the assignment is disputed by the assignor or any person claiming under him; or
(b) of any other opposing or conflicting claims to such debt or thing in action he may, if he thinks fit, either call upon the persons making claim thereto to interplead concerning the same, or pay the debt or other thing in action into court under the provisions of the Trustee Act, 1925.
(2) This section does not affect the provisions of the Policies of Assurance Act, 1867."
[The 1867 Act is to the same effect. s136 is in fact the re-enactment of an 1873 Act provision].
The express notice in writing is a unilateral act and binds the debtor etc (the insurer in context) to recognise that he then must pay the assignee not the assignor. He can still pay the assignor but would not get a good discharge and would suffer double jeopardy because he could be sued by the assignee. In practical terms therefore he has no choice in the matter.
An insurance contract is a personal contract in a sense and these, e.g. a contract of employment, are not generally assignable in law. A life assurance contract is one of the many exceptions to the rule. This is because it is in essence a contract to pay a sum of money in specified events, which makes it devoid of a personal character. This despite the uniquely personal feature of the quality of the actual life assured which is vital to the specific underwriting decision. There is no ready market for it because it is not fungible, like a listed share in a listed company. However it is marketable. The owner of such a policy could sell it to a buyer (assign it) in order to obtain immediate cash rather than wait until the insured event occurred. The buyer would bargain for a discount based on the estimated proximity of the payoff event, e.g. the death of the assignor, but he would be confident that once he gave notice to the insurer his only risk would be its creditworthiness and his getting badly wrong his estimated time before payoff. The price he would pay would essentially result from the same calculation an underwriter would make, including the degree of impairment of the life assured.
Many contracts contain a non-assignment clause. They may also contain a clause preventing a change of control in a corporate party or visit it with consequences. The Contracts (Third Parties) Act 1999 would also be disapplied.
The common theme is that such a party absolutely does not wish to deal with any person apart from the other original contracting party.
This would not normally bother a life insurer. Although the life assured is unique the policy is just a financial instrument or “product” and the insurer’s main concern is to pay out only if payment is due and to the right person, which includes an assignee where a s136 notice has been received, The notice may be given by either assignor or assignee and it must be “received” so an acknowledgment is a practical essential.
All this Hoo Ha can be totally circumvented by a declaration of trust, which is not itself an assignment though it may contain one; and an assignment could be made later with a s136 notice to ensure the insurer paid the trustees, if different, and not the settlor. It is possible though rare for a contract to exclude even a DOT and an equitable assignment but there is no decided case as far as I am aware and there might be a valid challenge to such a clause on the grounds of public policy: the transfer of the equitable interest in the benefit alone in no way affects the rights and obligations under the contract as between the original parties and unjustifiable restraints on alienation are viewed in principle with hostility by the Court.
It is also possible to assign the policy proceeds rather than the contract itself but this must be equitable only as they are a future asset. The assignment acts as a contract to assign. It needs consideration to be enforceable although that can be nominal (contract law does not insist on the adequacy of the consideration) or could be executed as a deed. The contract would be completed by an automatic assignment of the asset the moment it came into existence. The transfer for IHT and disposal for CGT would be deferred until then so for tax planning purposes it would not be a viable alternative.
I do not intend this as a personal attack but I do not do circumspection or circumlocution. That is why I have not been a partner in a “Big Firm” since 1990. I do not think it appropriate for any contributor to pass off on here as a legitimate tenable “opinion” something which I consider wrong in law. I am more than happy to listen to the cogent contrary legal arguments of even 3 lawyers on a weekly basis. As I am retired I am on here because I still enjoy researching and problem-solving and not for PR. Those who post accurately on here deserve any PR bonus but those who post inaccurately, and often, might find the PR counter-productive.
Malcolm is indeed an acknowledged tax expert but his article offered no views on precisely how he envisaged the policy would be placed into the multiple trusts, although I have no doubt that he knows as much about the law of assignment as any one.
Jack Harper
Hello Richard,
I totally agreed with you up until the bit about Legal & General having to agree to the assignment. I am not aware of any general provision requiring the life office to agree to the assignment of the policy (whether that is an endowment policy, single premium bond or term policy or any other type of policy). Unless, as mentioned previously , there is a non-assignability clause in the policy itself.
I can (just about) envisage a scenario where someone would sell their term policy to someone (for a fairly nominal sum) even if they were fully fit and healthy as the assignee would have the prospect of a windfall if the life assured died within the term. All sounds a bit grim and probably exceptionally rare but theoretically possible!
With regard to the question (I think) in your last sentence, I think there would only be an insurable interest issue possibly if the amendment would result in a brand new policy (but it depends very much on the policy terms and what is being proposed).
If its relevant I worked as a solicitor in the legal department of various major life offices from 1984 to 2017.
Hope that helps. All the best,
Robert Surridge
Robert,
Noted. I have always found the in-house specialists of the big insurers extremely competent on the law and related tax issues. Regrettably I have often had initial hassle in reaching them through the filter of others down the pyramid who tried to fob me off. If you persist you invariably get through eventually to an Organ Grinder. HMRC are similar.
In my early days I made much use of a book by Derek Hewson who had held similar positions to yourself. On a few occasions later on in the 90s I met him while advising on the same side. In his office he had created the most brilliant underground wine cellar. A bit of a legend! I was also lucky to meet Professor Ash Wheatcroft who wrote books on tax when few did and in those days was a rare tax academic. I never forget his take on tax avoidance: " A tax system breathes through its loopholes". This might perhaps usefully be recommended to Ms Reeves.
Jack Harper