Several years ago, a client assigned an existing life insurance bond to a Discretionary Gift Trust (Investment). My view is that, as the trust’s sole asset is a policy paying out only on death, it falls within the exclusions in Para 4a of the legislation. The FA has come back to me to say that’s not relevant and it still must be registered because it is a “Discretionary Gift Trust”. Is he correct?
The relevant heading on the HMRC guidance at TRSM23030 states “trusts holding life insurance policies” are excluded. I’m not a financial professional – can a policy that only pays out on death be something other than an “ordinary” life insurance policy and if so, how do I know if it’s registrable or not?
The concept of the DGT involves in effect a shearing operation under which the original settlor of the bond retains certain capital repayment rights under the “bond” with all other rights being settled for other beneficiaries.
The DGT is clearly an express trust for TRS purposes and prima facie registrable unless Sch 3A para 4 applies giving rise to an exemption.
Para 4 applies to a trust of a life policy (which a bond, normally a non-qualifying like policy, is albeit with minimal actual life cover) which pays out only in very limited circumstances (eg on death). In the case of the DGT, pay outs may arise due to partial surrenders, usually an annual amount up to 5% of the initial premium with such payouts not (according to HMRC) falling within para 4.
HMRC’s argument contained in TRSM 23030 appears to distinguish between “ordinary surrenders” of a life policy and a policy where “up front” it is anticipated surrender will be regularly made.
The underlying rationale would seem to be that a so-called “bog standard” life political held in trust qualifies for exemption from registration but where the life policy is substantially a pure investment vehicle with very limited life cover provided (eg a bond) protection from registration is, and never was, intended (under the wording of para 4).
HMRC have made it clear that the life policy exemption does not apply to single premium investment bonds. Quote from the TRES manual However, some policies (such as investment bonds) are designed to provide regular or periodic payments to the policyholder in the form of surrenders or part-surrenders during the term of the policy, with a small life assurance element payable on death which is incidental to the benefits provided through the surrenders. In those cases, HMRC’s view is that the withdrawals of cash in the event of a part or full surrender does constitute a pay out from the policy, because those withdrawals are intended from the outset as expected payments of funds from the policy. As this occurs on an occasion other than those listed at Sch3A(4), the exclusion does not apply to trusts holding these policies.
Regards, Kevin Raftery