Life Assurance to dodge IHT

glottalstop

Three years before he died my father realised his Estate was going to exceed the IHT nil band rate by around £150k.

In 2009-2010 he put the money into lump-sum life assurance - which I understand was an endowment-type investment which offered protected growth of 4% provided there were no drawings.

The life insurance had a twist - it was written as a "survivor" policy, meaning that the insurance paid out not on the death of my father but on the further death of another person named on the policy = a surviving beneficiary.

The survivor has since cashed in the policies outside of the accounting of the Estate, posturing they were not lifetime gifts and at the same time saying they were not part of the Estate. This is all a bit fishy to say the least.

So I guess these policies should be treated as either lifetime gifts (the benefit was assigned to the survivor when he was named on the policy) or should have passed back into the Estate (when the survivor chose to cash them in) - but which? The difference in terms of tax treatment and what should happen to the proceeds is significant.

SeniorSam

Do you know the details of the actual policy, or can you find this out?

Before I retired, I specialised in Inheritance Tax Planning and there were a number of policies that were used to help mitigate this tax, but each written in Trust

Names like Gift & Loan Trust, Loan Trust and various other policies. Knowing the name would help.

Sam

Mattygroves2

It's normal for life policies to be written in Trust so they fall outside the deceased estate completely. The idea is often for them to be used to pay the IHT due on death. They are neither lifetime gifts or part of the estate.

CLAPTON

the policy pay out will probably be outside the estate
however, the policy premium would be a PET

glottalstop

Evening Sam.

No original paperwork has been found.

The policy was described as a protected growth fund within a retirement portfolio, do the words secure income option and deferred income ring a bell? I believe the original capital came from a mixture of legacy life assurance endowment and personal pension funds at a time when my parents were both over 75. They already had income up to the higher rate tax threshold.

However, the first question asked of the (non-uk) life company was were these funds in trust, and the answer was reported to be an emphatic no.

glottalstop

CLAPTON wrote: »

the policy pay out will probably be outside the estate
however, the policy premium would be a PET

As a PET with just 3 years elapsed the funds are probably going to get clobbered for close to 40%; or worse, if HMRC decide that a penal rate applies because the survuvor has failed to disclose despite several pointed enquiries.

If it was a PET and 7 years had passed these funds would have escaped tax using this survivor life trick? Even though not in trust?

I wonder what the intention of my father was, and whether it has any bearing?

xylophone

The life insurance had a twist - it was written as a "survivor" policy, meaning that the insurance paid out not on the death of my father but on the further death of another person named on the policy = a surviving beneficiary.

In 2010 your late father bought a policy which would pay out not on his death but on the death of a certain person.

If this was a gift, then it should have been reported to HMRC by the executor of your father's estate as a failed PET and any IHT due paid then? Or was the "certain person" his spouse so that it fell outside IHT ?

The "certain person" has died.

The policy was not written in trust. Therefore the money fell into the estate of the "certain person" and should have been dealt with by the executor of his/her estate?

Was the executor also the beneficiary? The pay out was not declared to HMRC?

And you speak of "policies" - these were in addition to the policy mentioned above? Or were there several segments to the policy?

Which insurance company wrote the policy/ies?

What is your involvement in the matter?

SeniorSam

A retirement portfolio and deferred income would seem to indicate pension and a Trust for the purpose of protecting the maturity from the estate.

Therefore the Executor/s of your Father's Will should have known the details and declared them when dealing with the Will, otherwise they would br in default of their duties in making false declarations or concealing information. Records of what was declared will be in the Probate documentation, which you should be able can gain access to.

Were you a beneficiary of your Father's Will and was Probate carried out by a family member of solicitor?

The non uk life oiffice should be able to let you have details of the type of policy used, so you need to request that information.

Come back when you have more information please.

Sam

glottalstop

Thanks xylophone and again Sam.

The survivor was named as third-life on the policy after my mother and father, and was an equal beneficiary of the Estate (their combined estates), and was the named Executor but is no longer. My mother predeceased my father.

The policies were in 2 or 3 segments invested 2009-2010. While Executor the survivor cashed them in. A PET stemming from the original assignment was not disclosed and the subsequent cashing in was not declared despite the survivor being challenged several times. These discoveries are as the result of independent investigation.

I had never even heard of a third-life insurance policy, second-life policies are usually between spouses and are designed to pay funeral expenses or inheritance tax liabilities?

I expect there will be a serious dispute to come so I won't go into more specifics now. Suffice to say that the IFA involved no longer exists having lost its indemnity insurance under the weight of mis-selling claims, and the life company itself is no longer authorised by the FCA probably because it uses too many words like protected guaranteed and secure for the UK regulator.

Would anyone consider this to be an open way to avoid tax - I can see the superficial cleverness in the trick but I think my parents were wrongly advised or even mis-sold. I certainly do not think they intended to make such a large personal gift, because their last wills made in mid 2010 divided the Estate simply and equally between all beneficiaries. Otherwise why not just gift or set up a trust?

So I was interested in what people would think in principle and what facts it would turn on.

I expected some argument whether this should fall within the Estate, perhaps depending on the terms which the life company stipulated when allowing the survivor (while Executor) to cash the policies.

Some clarity has been added to the idea that if these funds fell outside the Estate then they were certainly PETs, and it makes sense that as soon as the survivor was added as a third-life the policies had effectively been gifted. In that case a hefty punishment from HMRC could follow.

My own view is that despite the "life wrapper" these policies were never intended to continue until the death of the third-life, it was always intended that the survivor would cash them in on second-death. As a condition of encashment the life company should have directed that the proceeds be included in the Estate; or to exempt the proceeds from the Estate the policies should have made to run in accordance with the "life wrapper" until the death of the survivor.

I'm hoping that those terms were expressed in writing when the life company allowed the survivor to cash in the policies, which would reduce my risk of instructing someone to pursue this.

SeniorSam

This certainly sounds like the sort of policy set up specifically to help pay for future inheritance taxes. Written on the lives of your parents and 'another', with the 'other' being a beneficiary that would be trusted to use to money for that purpose. In my opinion, the scheme was intended not to avoid IHT, but help protect against it for the beficiaries of the estate.

Was advice of a solicitor sought on this prior to the policy beeing effected.? Notes may be on file if it were.

The original Terms and Conditions from the life office would have explained what this type of policy was used for, as there is always this sort of documentation given to a client, so try and find that or get a copy from the company. If it states that it is to help protect the inheritance tax or any reference to that use, then you have a very strong case.

The proceeds were undoubtedly intended to be outside the estate and used by the last life to pay taxes for the family, otherwise they would be adding to an IHT liability.

I do hope you succeed in getting this sorted out as it looks like someone is lining their own pocket at the expense of others.

Sam

glottalstop

Outcome - this puzzle has now been resolved.

Although the "survivor" was named as a life assured, the actual policy owner was my father. On my father's death the survivor who was also the Executor sought to assign/cash the policies at which point the proceeds should have passed to my father's Estate. Funds were released only on production of the grant of probate, and strictly on the Estate condition, which was put in writing by the life company.

The (former) Executor now admits the proceeds should have passed to the Estate and been subject to IHT. Moreover, he has been obliged to acknowledge that in the alternative he should have declared the funds anyway as PETs.

He has not explained his actions yet, nor has he returned funds to the Estate, and there may be a penalty to pay .... there have been some spectacular cases very recently where people dodging IHT have been held to account by the courts.

So despite the superficial cleverness of this trick it was never a legitimate way of Cutting Tax.