Fixed Probate Fees, call:

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Taxation on Life policies

Life insurance policies are used for a variety of reasons, whether it is to p r o v i d e f o r dependant's or making a future provision to pay an IHT liability. If these policies are written in trust they fall outside the estate for IHT purposes but what is the tax treatment during the donor’s lifetime? There are different types of insurance policy. The mains types are as follows: • Whole of life policies—a sum of money is paid out on the death of the life assured. Where a married couple take out the policy the sum can be paid out on the death of the first spouse or on the second death. • Endowment policies—these provide for the payment of a sum on the expiry of a given period if the insured is still alive. Usually the policy will provide for a sum to be payable on the death of the insured during the specified period. • Term policies– these provide a sum to be paid if the assured does not live for a specified period. If the assured survives this period then nothing is payable under the policy. For most policies income tax will not be payable on the proceeds. This is because they will be classed as ‘qualifying policies’ if it complies with the Income Tax and Corporation Taxes Act 1988. Those policies that do not comply include endowment policies which cannot last for more than 10 years or policies for which a single premium is paid. The declaration of trust for a life policy will constitute a potentially exempt transfer for IHT if the transfer is to a disabled trust or a gift into a bereaved minor’s trust on the end of an immediate post death interest. A transfer of a policy into any other trust is a chargeable lifetime transfer. Frequently there will be no IHT payable on the transfer of a policy due to annual exemptions. The value transferred will be nil if no premiums have been paid otherwise it will be the higher of the market value, the surrender value or the total premiums paid. If the insured continue to pay premiums after the transfer is made then each payment could be a PET however payments are likely to fall under the ‘normal expenditure from income’ rules. Although a policy which is the subject of a declaration of trust will not form part of the estate of the insured for IHT if a spouse or children with a vested interest in the policy predecease the insured then the policy will form part of their estates.

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