C5.3 Taxation Treatment of Life Policies

Inheritance Tax is normally charged at...

40% over the nil‑rate band, except if 10% is left to charity (36% IHT).

The Residence Nil Rate Band is...

£175,000 for if estate is left to direct descendants.

Inheritance Tax exemptions include...

Spouse transfers, charity gifts, wedding gifts, annual exemption, small gifts, normal expenditure out of income.

Potentially Exempt Transfers (PETs)

• include outright gifts, bare trusts, disabled trusts.

• require 7 year survivorship

• taper relief applies if over NRB

Chargeable Lifetime Transfers (CLTs)

• include gifts to discretionary trusts and most other trusts.

• are charged 20% over NRB if paid by trustees or 25% if settlor pays

• also has taper relief and 7 year survivorship

Funds for IHT are required to...

Pay IHT before obtaining Grant of Probate.

An effective way to provide funds is to...

Write a life policy under trust so payment is made to trustees.

A life policy under trust helps...

Prevent asset sales to pay IHT and preserve estate.

Premiums for a joint life second death policy are...

Lower than joint life first death.

When calculating cover...

Determine IHT if death occurred today and index up - level is inadequate if required over long period so index or include investment element.

Premiums can be paid using...

£3,000 gift IHT annual exemption or normal expenditure out of income.

On joint life cases...

Each spouse should use their own exemption.

PETs are normally insured using...

Seven‑year decreasing term assurance in line with taper relief (inter vivos).

Property held passes...

• Automatically to the survivor - joint tenants

• According to will or intestacy - tenants in common

An unused nil‑rate band or residence nil-rate band can be transferred to...

A spouse or civil partner - however should consider redistributing estate to use both NRBs on 1st death

Laws of intestacy are…

• spouse but no issue - get everything

• spouse and issue - spouse takes chattels and £322k plus half everything else, children get other half

• no spouse - issue get everything or grandchildren if no issue

• no issue or grandchildren - parents or brothers/sisters if no parents

• no relatives - crown

If children are minors...

Held on statutory trust until 18 or earlier marriage.

Marriage or civil partnership...

Revokes a previous will unless made in anticipation of marriage.

Following divorce…

• appointment of spouse as executor is cancelled

• benefits under will to former spouse are cancelled unless states otherwise

To be effective for IHT, a Deed of Variation must...

• Refer to the will/intestacy.

• Be done within two years of death.

• Contain a statement that the variation is to have effect for IHT purposes

• Be signed by all making the variation

• Be no consideration

If all conditions are met...

The original recipient is not treated as making a transfer of value for IHT

A Deed of Variation effectively...

Rewrites the will/intestacy.

Property may be disclaimed when inherited provided...

It has not been accepted.

A disclaimer must be made within...

The same 2-year period as deed of variation and no consideration

The disclaimer itself is...

Not a transfer of value.

Following a disclaimer...

Property passes back into the estate.

The person making the disclaimer...

Has no choice over who inherits.