Discretionary Trust Taxation - policy has a value on a 10th Anniversary
For a life insurance policy that has no ‘savings’ element (one that will never have any value except in the event of a claim) placed in a discretionary trust, there will be no Inheritance Tax liability in the event of a claim, unless the policy has a value or is deemed to have a value, at a 10th anniversary.
‘10th anniversary’ quite literally means the 24-hour period from ‘midnight to midnight’ of the exact date of the tenth anniversary of the date the policy was placed in trust. |
In the event of a death claim shortly before a 10th anniversary, unless the trustees pay the claim proceeds out quickly, or if the policy has a value due to poor health, there may be a tax liability.
However, this tax liability would be the excess (only the excess) of the value of the trust (i.e. the policy proceeds) over the then Inheritance Tax ‘nil-rate band’. The nil-rate band as stands on a 10th anniversary is used, not the value of the nil-rate band when the policy was first placed in trust.
The maximum tax liability, if the trust has a value on a 10th anniversary will be a relatively small sum, as this example shows. The excess above the 10th anniversary nil-rate will be taxed at a rate of 6%
If the term of a policy were to be more than 20 years, there would obviously be more than one 10th anniversary. Please note, this '10th anniversary problem' will occur on each and every 10th anniversary, not just at the first 10th anniversary.
