Life policies are extremely flexible and, because they are
linked to the survival of human life, uniquely fitted to serve the
role of Inheritance Tax (and previously Capital Transfer Tax and
Estate Duty) mitigation and avoidance devices. Although the
Inheritance Tax Act contains a number of anti-avoidance provisions
aimed at policies, for the most part the charge to Inheritance Tax
on policies arises under the ordinary charging provisions.
So where a person transfers a policy to another, its value at
the date of transfer may be taxable as a gift and, if they effect a
policy in favour of another, so may the cost of effecting it
(normally the amount of the first premium). Similarly if they pay
the premium on a policy owned by somebody else the amount of the
premium (subject to any exemption due, such as normal expenditure
out of income (
IHTM14231)) may be a Potentially Exempt
Transfer (
IHTM14024) or a chargeable transfer (
IHTM04067).
When the life assured dies the proceeds of the policy will be
payable to the person owning the policy or to some other person
specified under the terms of the policy. If that person is the life
assured, the proceeds will form part of their free estate and so
will be taxable on their death. Where however the beneficial owner
of a life policy dies before the life assured there will be a
transfer on their death of the life policy with the other assets in
the estate.
Settled policies are normally treated in the same way as
other settled property.
