Settlor created a discretionary trust about 30 years ago, of which the beneficiaries were the settlor themselves, their spouse and descendants. The only assets in them were life assurance policies which pay out on the settlor’s death.
Is the trust settlor-interested because the settlor is named as a potential beneficiary, or not because they could never actually benefit from the assets during their lifetime? I’m leaning towards the former.
The fact that the trustees’ assets are one or more life policies that pay out on the settlor’s death is not in itself sufficient to exclude him from being able to benefit.
You do of course have to question carefully every instance in which it might matter to see whether it actually does or not. There is nothing in trust law barring or penalising it so invariable this is the role of tax law provisions and usually of an anti-avoidance variety.
While the trust owns just a life policy it will not generate income for income tax purposes. So the “settlement” rules though nominally applicable have no practical effect. If the policy is NQ the chargeable events code will tax the settlor/creator of a trust on a gain (as income though it is capital) even even if he cannot benefit from it—unless he is an “absent” settlor: see IPTM3200-3290, especially 3250.
So if he and the trustees are resident a gain arising on his death or after it but in the same tax year is chargeable on the settlor. I stress: it does not matter that he could not benefit. A non-settlor who pays premiums on a settled policy is taxed as a settlor and there can be multiple chargeable settlors. To avoid this it is often decided to appoint out the policy, not triggering a gain, to one or more beneficiaries who will be chargeable instead of the settlor when the policy matures on his death: IPTM3220
CGT is not generally an issue unless the policy is “second-hand”: s.210 TCGA.
For IHT a settlor of a trust policy will make a GROB if not excluded from benefit under the trust. S102(3) FA 1986 deems the “property subject to a reservation” to be beneficially owned by him “immediately before his death”, so comprised in his s.5 IHTA “estate” and chargeable on his death via a s.4 transfer of that estate.
So technically his death comes after the chargeable event which precedes it scintilla temporis at a time when he is still theoretically able to benefit (or falls within 7 years of his last having ceased to do so).
Of course he must make a “gift” of “property” and that property must be identified as one from which he can benefit or from which he has not been entirely excluded. Therefore he must either settle the policy or pay the premiums or both.
If he has any right or opportunity to benefit from the policy under the trust he is taxable on the whole policy value whatever the quantum of his gift: so if any continuing premiums are paid by others his liability is not proportionately reduced.
If his GROB nexus to the policy ends during his lifetime he makes a s.102(4) PET.
A policy trust created on or after 22 March 2006 is going to be a relevant property trust for IHT unless it is a disabled person’s trust: s.49(1A) IHTA. The latter will create a QIIP trust. It was settled under estate duty case law that a person can have an IIP in a life policy which yields no income because, so fiendishly devious is the judicial mind, it could produce income if the provider were to go into liquidation and the insolvency distribution monies thus were to become available for investment.
Jack Harper
The answer may be simple: