The position for life insurance policies written into trust
before 22 March 2006 is set out in S46A IHTA, and life insurance
policies written into trust then falling within S.71, at S.46B.
Individual’s who exercise an option to increase payments into
existing life insurance policies after March 2006 will not create
fresh relevant property settlements. If post 6 April 2008 a
beneficiary of a life policy dies before the life insured, that
beneficiary can be replaced without any impact on the treatment of
the trust.
For pre 22 March life policies, where there is a change of
beneficiary for reasons other than death then, in most situations,
a charge would not be triggered. For instance, a change of
beneficiary during the period up to 6 April 2008 would not result
in a charge. If the policy is held in a pre 22 March 2006 Interest
in Possession Trust in favour of a spouse with the assets in the
trust then going absolutely to their children on the spouse's
death, then the addition of a new child to the list of ultimate
recipients of the money has no IHT effect.
If the policy is held in a pre 22 March 2006 S.71 Trust and
the trust allows for new beneficiaries to be introduced, then the
addition of a new beneficiary will not trigger a tax charge. The
trust will be treated like all other S.71 Trusts, with no charges
provided children take the trust assets absolutely at 18.
If a pre- 22 March 2006 Interest in Possession trust was
written for the benefit of individuals (direct or in sole names)
and a further beneficiary was added after 6 April 2008, then this
division of the interest(s) to favour the new beneficiary would be
treated as a new settlement. This new settlement would trigger a
charge on the amount over the threshold.
Section 46A provides for cases where such a policy was, on
22nd March 2006, settled
property in which the interest in possession subsisted. As
long as the IIP lasts, the policy continues to be treated as
property settled before 22nd March 2006.
Where premiums are paid on or after 22nd March 2006 Section
46A deems those rights settled, and to have become property in
which the IIP subsists, prior to 22nd March 2006.
What if the contract was varied on or after 22nd March 2006?
Wherever the provisions of a contract are altered, there is always
the possibility that it is not a variation (the same contract with
changes) but is an entirely new contract. Where there is a
straightforward variation, it must be ensured that if any new
rights arise from the variation they become property comprised in
the settlement, and are treated as having been settled before 22nd
March 2006. However, this is limited to variations made in exercise
of rights conferred by the pre 2006 provisions of the policy or
made by the automatic operation of those provisions. In most cases
it will be clear that nothing new is settled: if all the rights and
benefits under the policy are already settled, it may be the case
that any enhancements were settled when the settlement was created.
However, new rights may be conferred not by the variation as such,
but when premiums are paid after the variation. Where the changes
amount to there being a new contract, either the parties to the
policy will have changed or the contract will be fundamentally
different.
Section 46A provides protection to the interest in possession
that was subsisting pre Budget Day but extends to any transitional
serial interest that, under the settlement, subsists in the policy
By way of example: a life insurance policy is written into
trust for the benefit of the two children (each has a 50% share)
and a third child (perhaps born) and added to the list of
beneficiaries (and each ends up with a 33% share).
