Tax Treatment of Premiums for a Policy in Trust
Any premiums paid for a life insurance in trust are gifts for Inheritance Tax purposes unless they fall into one of the available exemptions. (For a full list of the exemptions see: HM Revenue & Customs.)
The initial premium of a life insurance policy would normally be deemed to utilise part of the annual exemption, with ongoing premiums utilising the gifts out of normal expenditure exemption.
The Annual Exemption:
This is an amount (a total amount per tax year, not an amount per individual gift) that one can give away each tax year, without attracting any Inheritance Tax.
The annual exemption has remained the same since the tax year 1981/1982 at £3,000 per tax year.
Gifts Out of Normal Expenditure:
Unlike the annual exemption, the 'gifts out of normal expenditure' exemption does not have a set upper limit.
The underlying premise is that the gifts should be both of a regular nature and should not materially reduce the standard of living of the person making the gifts. In addition, the gift should be made out of income, and not out of capital. If the donor was making regual gifts out of capital or maintaining their standard of living by withdrawing capital, this is likely to invalidate the exemption.
It is apparent that if the premiums of a life policy in trust are paid annually, six-monthly, quarterly or monthly, that the ongoing regularity of the arrangement is clearly demonstrated, in order to satisfy the 'gifts out of normal expenditure' exemption.
