life insurance- taxable component of estate?

Perhaps I should have cross-posted to uk.legal, but I'm pretty sure that so meone here will know the answer. My question is: does a life insurance payo ut count as a declarable part of a deceased person's estate and more partic ularly, if it does, is it a taxable or a tax exempt part (i.e. does it coun t toward the amount taken into consideration for IHT purposes?). As a furth er consideration, does it matter how the insurance was arranged (e.g. a sta nd-alone policy versus one that is included as part of a pension scheme)? B eyond this, for someone who dies intestate, does it matter whether the life insurance scheme has a named beneficiary? Advice appreciated. Regards, Jim .
Reply to
jimwalsh1972
HMRC is your firend . It's all covered in detail in their guidance - eg on filling in the Inheritance Tax forms <
formatting link
But very much in summary: a. proceeds from life insurance policies which are paid to your estate when you die are part of your estate for IHT purposes and taxable; b. proceeds from life insurance policies which are paid to someone else when you die are not - eg ones which pay to your child. But there are details to watch: eg if you put a policy in trust you have to surive 7 years to escape all tax.
I can't see how intestacy affects this. Apart from anything else, a will cannot dispose of propeerty which isn't part of the estate in the first place.
I'll pass on pension schemes as I can't see any difference as regards true life policies but many used also to have lump sum death benefits which lookeed like them but weren't.
Reply to
Robin
Many pension schemes have lump sum death benefits for which the Trustees are required to use their discretion when deciding who should receive them. It is important in these cases for scheme members to complete an 'Expression of Wish' form, which will be taken into account by the Trustees when paying the death benefit - particularly in cases where you would want it to go to a partner to whom you are not legally married or in a civil partnership. In the absence of this, the Trustees are likely to pay it into your estate - where it may then become liable for IHT.
Reply to
Roger Mills
The insurance company in question should provide a "chargeable event certificate": they should be able to indicate whether the policy is taxable or not.
Some policies are qualifying (tax tree) and some are non-qualifying. There are rules as to what qualifies. Again, the insurance company should be able to help.
Google will help, and so (as another poster has pointed out) will HMRC. The Estate and Trust offices of HMRC are generally very helpful.
Reply to
Allan
Many thanks. Appreciated. I particularly wasn't clear whether having a name d beneficiary for the insurance payout made a difference (e.g. money going straight to the nominee, bypassing the estate), or whether all would be pro cessed as part of the estate, regardless. Cheers. Jim.
Reply to
jimwalsh1972
Yes but it may be worth adding that it is not only a trust which can (potentially) take a policy out of IHT. A simple assignment of a life policy to another person can suffice if done early enough. That's why the IHT return asks about if the deceased paid for life assurance policy for the benefit of someone else within the past 7 years.
While I'm here perhaps I could also add that IIRC a "chargeable event certificate" deals with whether there are "gains" which (just to confuse mere mortals) may give rise to income tax. On death that tax may be on the deceased or the executors. I didn't think it dealt with the IHT position at all - but things may well have changed (or I could be just plain wrong).
Reply to
Robin
someone here will know the answer. My question is: does a life insurance pa yout count as a declarable part of a deceased person's estate and more part icularly, if it does, is it a taxable or a tax exempt part (i.e. does it co unt toward the amount taken into consideration for IHT purposes?). As a fur ther consideration, does it matter how the insurance was arranged (e.g. a s tand-alone policy versus one that is included as part of a pension scheme)? Beyond this, for someone who dies intestate, does it matter whether the li fe insurance scheme has a named beneficiary? Advice appreciated. Regards, J im.
Re Robin's reply, I don't think it's correct to say if the policy is in tru st you have to wait 7 years before the proceeds become tax free. If the pol icy pays out to a trust it's not into the estate so it's tax free immediate ly.
Reply to
cryptogram
I was indeed very possibly wrong. I am way out of date; and never understood it all before I decided I had reached my sell-by date.
What I think I had in mind was not tax arising from the *proceeds* of the policy but from the *transfers* when a policy is assigned and/or premiums paid.
IIRC the assignment of an existing policy to a bare trust is a transfer of value for IHT purposes. The value of the policy is often negligible or small (eg if it is a simple whole life policy and the person is in good health). So it's usually covered by the annual gift exemption. But if not (or if that exemption has already been used) the transfer will be a potentially exempt transfer. Then the 7 years comes into play.
Then there's the payment of premiums for a policy held in a bare trust. I think they, if not covered by the annual exemption for gifts or the exemption for normal expenditure out of income, can create PETs.
With hindsight it wasn't worth mentioning the effects of such things: anyone with enough money to be affected in practice shouldn't be coming to Usenet for advice.
Or, as I said, I may just be plain wrong.
Reply to
Robin

I thought that HMRC ignored bare trusts and assumed that all the value belonged to the beneficiary. Most IHT avoidance trusts seem to be formulated as discretionary trusts, where there is more than one potential beneficiary and the split is not certain in advance.
Do trusts actually count for PETs? I thought PETs had to be to natural persons.
Reply to
David Woolley
I've already declared my ignorance of much of IHT. So I offer the following in the hope you or others will help me if I've misunderstood your points.
I thought that was in the nature of a bare trust. That is, with a bare trust the beneficiary has an immediate and absolute right to both the capital and income . The trustees have no discretion.
Very possibly. I have no idea of the current split. But my impression was that there are still a fair few life assurance policies used with bare trusts to protect against the effects of IHT on minor children. One of their selling points was of course that they do not attract the periodic/exit charges imposed on discretionary trusts.
Can you point me to anything on that? Puzzles me. On 2 main counts. First, the basic definition of a transfer of value in section 3 IHTA 1984 looks only at whether the disposition reduces the value of the transferor's estate, not at the recipient. Second, if only transfers to natural person were caught I'd have thought there'd be a stable door for people to make lifetime transfers to shell companies owned by their children, mistresses etc in order to avoid IHT.
Reply to
Robin
Typical bare trusts are unit trusts and shares held in nominee accounts.
In those cases the settlor also the beneficiary and HMRC doesn't consider there to be a transfer at all, and taxes income as normal income .
Possible, but if they are bare trusts, HMRC will, I think consider any transfers to have been immediately made to the children. However, it is
not an area I've had cause to investigate in any detail.
I think you missed the point. Transfers to shell companies are immediately chargeable; they do not cease to be taxable if you survive seven years and you may have to pay capital transfer tax on them before you die. The distinction was not between potentially exempt and absolutely exempt, but between potentially exempt and not exempt at all. I think you can still use your annual exempt allowance, but not, of course, your £250 allowance, as that is for natural persons, only.
formatting link
Note that this also says that lifetime transfers into discretionary trusts are immediately chargeable. Accumulation and maintenance trusts are OK, presumably because there is only one beneficiary. However, I suspect, if I looked further, one would find that the value of such a trust was part of the beneficiaries estate.
Reply to
David Woolley
In article , snipped-for-privacy@btinternet.com says...
one that is included as part of a pension scheme)? Beyond this, for someone who dies intestate, does it matter whether the life insurance scheme has a named beneficiary? Advice appreciated. Regards, Jim.
Life insurance payouts to a named beneficiary are normally covered by the exemption for "small gifts out of income". Ask the tax office.
Reply to
Philip Herlihy
Yep - IIRC HMRC's analysis of the law is that a bare trust for a minor is not a settlement for IHT purposes.
I did indeed misread you as saying that only transfers to natural persons were chargeable. My apologies for that senior moment.
As regards the rest, I take it you are ignoring bare trusts. The way they can count for PETs is covered in even the simplest explanation of IHT and trusts from HMRC () which has "Transfers into a bare trust may also be exempt from Inheritance Tax, as long as the person making the transfer survives for 7 years after making the transfer."
As for accumulation and maintenance trusts, their special relief from IHT has gone now following FA06. But there are new (narrower) reliefs which mean there are other trusts which count for PETs. And I see section 3A
formatting link
has been amended to make this explicit which I think is a "good thing". In any event, we've veered a long way from the OP's question about a life insurance where I've already accepted that I showed an excess of caution in mentioning the possible application of the 7 year rule.
Reply to
Robin
I would read "tax office" to mean the Probate and Inheritance Tax Helpline on 0300 123 1072. As others have said, they are generally v helpful.
Reply to
Robin

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.