There are special statutory provisions dealing with life
policies linked with annuities because this situation is frequently
used to avoid Inheritance Tax.
What happens in the typical case is that someone in poor
health buys an annuity for their own benefit for a lump sum and at
the same time buys a life policy on their own life but for the
benefit of someone else. The annuity is used to pay the premiums on
the life policy. The idea is to make the transfer to the
beneficiary non-taxable by making use of the normal expenditure out
of income exemption (
IHTM14231) under IHTA84/S21.
However, someone in poor health would not normally be able to
take out life assurance at normal premium rates because it would be
financially disadvantageous to the insurance company. The only way
the company would agree to write a life policy whose sum assured (
IHTM20086) was substantially in excess
of the premiums paid was if it derived an even greater benefit from
an associated transaction, in this case the annuity taken out in
conjunction with it. With the linked annuity, the health or life
expectancy of the life assured (
IHTM20081) would not matter to the
company because it would benefit from either the annuity or life
policy depending on how long the policyholder lived.
So without special statutory provisions (
IHTM20374) a tax-free transfer of
capital would take place by using an exemption designed for the
transfer of income.
Linked annuity and life policies are termed
“back-to-back policies” (
IHTM20087)
