Discretionary Trust Taxation - poor health on 10th anniversary
A perhaps unintended consequence of the 22 March 2006 trust taxation changes is that HM Revenue & Customs may ‘deem’ a policy as having a value, possibly as much as the full sum assured, if the insured person is in gravely ill health at the time of a 10th anniversary.
Under such a circumstance, a tax liability could arise, even though the life insurance policy may not have paid out, because the insured person had not actually died.
(However, many life insurance policies have 'terminal illness benefit' and providing this benefit has also been placed in trust, and assuming a claim has been made and paid out before the date of the 10th anniversary, if the trustees acted quickly and paid the money out of the trust to the beneficiaries before the date of the 10th anniversary, the trust will have no value and no tax will be payable.)
It is extremely important that if the sum assured is paid out under the terminal illness feature, that none of the money is used for the benefit of the insured person. If it is, it is likely to invalidate the trust, with the consequence that the full payout of the policy will be included in the insured person's estate when they subsequently die and therefore potentially subject to 40% Inheritance Tax. |
