Valuation of life policy for 10 year relevant property trust harge - is this apportioned?

UK Deemed dom settled a US (term) life policy into trust, which will be a relevant property settlement.

Non UK dom settles cash on trust to pay the annual premiums on the policy (thereby creating a “new” but excluded property settlement)

On the 10 year anniversary, the policy will have a surrender value. But how do you apportion this value between the relevant property settlement (created because the deemed dom settled the life policy in the first place) and how much is excluded property (because the policy only continues in existence as a result of the fact the non-dom has continued to fund the cash with trust that has been used to pay premiums)? Assume value exceeds NRB.

1 Like

I assume the non-UK domiciled person settled cash into the same trust. It is best to avoid this situation.

IHTA S 44(2) generally says there will be deemed to be two separate settlements ‘if the circumstances so require’. The question here is whether the circumstances require this. It will not invariably be the case.

See HMRC RI166 (February 1997). Where a clear or reasonably sensible attribution of settled property between the contributions made by several settlors is possible, there will be a separate settlement, each with its own attributed assets, for each contributor for IHT purposes. If such an attribution is not feasible, each separate settlement will comprise all the assets of the single, actual settlement.

Based on this, I would suggest the whole settlement is non-excluded property.

Paul Davies
Clarke Willmott

I would be very interested to hear if anyone has had any real-life experience of dealing with HMRC on this point. I have set out below my thoughts, but first I should add that I have come across a similar situation where a non-UK domiciled individual settles a non-UK policy into trust, paying the premiums from a non-UK account – so that the trust contains only excluded property – and then the settlor becomes deemed UK domiciled and continues to pay the premiums: what portion of the policy / its proceeds is excluded property and what is relevant property?

Turning to Paul Davies’s comments, in relation to the exception in s44(2), HMRC say in their manual - IHTM42253:

"*IHTA84/S44 (2) says that, where more than one person is a settlor in relation to a trust and the circumstances so require, IHT provisions shall have effect as if the settled property were comprised in a separate settlement. *

In practice, you can take the phrase ‘and the circumstances so require’ to mean, ‘in a simple and straightforward case’. You can accept the separateness of direct additions made by the settlor’s favourite aunt, but if for instance the added property is situate in Liechtenstein and transferred by a nominee in Liberia to a trust company in Jersey you would need to satisfy yourself as to what the circumstances were and whether they require treatment as separate trusts. "

From their example, it seems to me that HMRC might not apply the “separate settlements” rule is where, in reality, the second “settlor” is really the first settlor again – adding to the trust by way of a nominee.

Suppose a person settles into trust a property worth £300,000 and another person shortly afterwards settles a further £300,000 into the trust and this money is spent on substantially improving that property (maybe having it knocked down and a new one built). Suppose the property is then worth £800,000. My view would be that £400,000 of that is in each “IHT settlement”.

With a “pure life” policy (which I do not think the policy in question is, as it appears to have a surrender value), one could say that the policy in its state conferred by the payment of premiums up to the last premium paid has no value at all one day after the next premium is due unless the next premium is actually paid. I can therefore see an argument that, for such a policy, if the settlor settles the policy and pays the premiums up to a certain date, then a “second settlor” takes over paying the premiums, that the whole value of the policy effectively moves into the “IHT settlement” of the second settlor.

However, I am not convinced that that is the correct approach. The value of the policy (if a pure life term policy) is normally negligible for IHT purposes, unless the life assured is seriously ill. Nevertheless, it must have some value, since, at the time that the second settlor starts to pay the premiums, it is unlikely that the second settlor could go out and obtain a new policy on exactly the same terms (even if they do that very soon after the policy is established) - there is likely to be some difference and it would involve new underwriting, the life assured would need to be involved, etc, etc.

This is even more the case where there is a surrender value as at the date that the second settlor starts paying the premiums: that value (which will continue to enure for the benefit of the trust after the second settlor takes over paying the premiums, although further surrender value may accrued subsequently) must derive from the contribution(s) of the original settlor and therefore there must be some value in the original settlor’s IHT settlement if the policy has any value at all. However, as time goes on, more surrender value will accrue on account of the second settlor continuing to pay the premiums.

My conclusion is that the reasonable way to proceed with a “pure life” (no surrender value) policy is that one should compare the respective amounts contributed to the trust by the respective settlors. The “amounts” involved I would say are the premiums paid by each of them. If the original settlor had paid premiums prior to settling the policy into trust, then I would include those premiums when calculating how to apportion the policy value/proceeds between the two IHT settlements. Indeed, for “whole of life” policies, even the IHTA says that the policy’s value for IHT purposes is normally “not less than” the sum of the premiums paid up to the relevant point (very brief summary of s167) (although the market value may be higher eg if the life assured is seriously ill or if the policy has a surrender value greater than the sum of the premiums paid). So it does seem to me that it would be reasonable (if the life assured is not seriously ill at the time the second settlor takes over and if there is no surrender value) to work on the basis that when apportioning the value of the trust fund between the two IHT settlements, one should apportion according to each settlor’s contribution: the contribution to the trust by each settlor being the sum of the premiums that each has paid.

I appreciate that the valuation rule in s167(1) does not apply to term assurance policies, but I see no reason why the same approach should not be followed. If one takes a more extreme example of where the life assured has become seriously ill before the second settlor starts paying the premiums, there is no way that the second settlor could obtain a life policy on the same terms, without the first settlor having first taken out the policy before and then paid the premiums up to that point. Indeed, in such a case, it would be more appropriate to have the policy formally valued and one might then find that, if the second settlor only pays a few modest premiums before the life assured dies, still the majority of the value remains in the original settlor’s IHT settlement, when one compares the value accrued by virtue of the original settlor’s contributions to the additional value accrued by virtue of the second settlor’s subsequent contributions.

Where a policy has a surrender value, it might be more appropriate to consider the “contribution” by the original settlor to be the surrender value of the policy at the date that the second settlor takes over paying the premiums (if that surrender value is more than the total the original settlor has paid in premiums and more than the market value of the policy based on the life assured’s health). One ought to look at all three of the options to see which is the most appropriate and reasonable to use in the circumstances: contributions based on 1. premiums paid, 2. surrender value, 3. actual market value.

The above is not specifically drawn from any commentary, but from my own consideration of the IHTA, HMRC guidance and what seems to be a reasonable approach.

Turning, at last, to the specific situation posed by Sophie Mazzier, it isn’t clear to me whether the original settlor actually paid any of the premiums on the policy at all, or whether he paid just the initial one, or several, before the second settlor took over. Even if he paid none, one might need to consider the circumstances very carefully, but it could be that he would be treated as having paid one premium and the second settlor effectively made a gift to the original settlor of that first premium (by paying the premium on behalf of the settlor). As I say, it depends on the precise circumstances. If the original settlor paid only one, or even none, of the premiums, I would argue that most (if not all) of the value falls into the IHT settlement of the second settlor (assuming that the second settlor paid the premiums for the rest of the first 10 years of the trust, up to the ten-year anniversary. However, we would also need to consider the surrender values at the relevant times as well, in the way I have described above, in case that gives a more appropriate apportionment of value. NB also that the second settlor’s settlement for IHT purposes presumably begins when they first paid a premium on the policy (except possibly that first premium, if it is construed as a gift from the second settlor to the first settlor).

In relation to my own scenario (which involves a term policy with no surrender value and the life assured is in good health), I would use the same approach and therefore treat part of the value of the policy (or its proceeds) as excluded property and part as relevant property, treating the trust as if it were settled by two separate settlors, the first being non-dom and the second deemed-dom, apportioned according to the premiums paid by each.

Paul Davidoff
New Quadrant

[with apologies for the length of this ….!]