CG69052 - Life insurance policies/deferred annuities: exemption for second hand policies: disposals from 9 April 2003: exclusions from the exemption: example of interests derived directly and indirectly

This example illustrates how interests in the rights conferred by a life insurance policy can be derived ‘directly’ and ‘indirectly’ from the original rights, or interests in those rights, as various interests are created and merged. And how the giving of actual consideration at different stages can cause the exemption to be lost.

Facts

  • Date 1: Ms Murder owns all the rights conferred by a life insurance policy.
  • Date 2: She transfers a half interest in the rights to Mr Doll, so that they each then have a one half interest in the rights.
  • Date 3: Mr Doll transfers his half interest in the rights to his three sisters, so each of his sisters has a one sixth interest.
  • Date 4: Two of Mr Doll’s sisters transfer their one sixth interest in the rights to their nephew, Mr Stone, who then has a one third interest in the rights.
  • Date 5: Ms Murder, Mr Doll’s sister and Mr Stone, all transfer their interests in the rights under the policy to a third party, Mr Sour.

What ‘directly’ or ‘indirectly’ derived interest does each hold

  1. From date 1 until date 2 Ms Murder simply held the rights conferred by the policy. From date 2 to date 5 she held a half interest in the rights, which was directly derived from the rights.
  2. Mr Doll also held a half interest in the rights from date 2 to date 3, which was directly derived from the rights.
  3. Between dates 3 and 4 two of Mr Doll’s sisters each held a one sixth interest in the rights, which was directly derived from Mr Doll’s interest. The other sister held such an interest from date 3 to date 5. The interest each of the three sisters held was indirectly derived from the rights.
  4. Mr Stone held a one third interest in the rights from date 4 to date 5. This was directly derived from the interests in the rights previously held by the two sisters, and indirectly derived from both Mr Doll’s interest and from the rights.
  5. Mr Sour simply held the rights conferred by the policy, not an interest in the rights, from date 5 onwards.

What if actual consideration was given at some stage

Whether the exemption is available depends on whether the rights, or an interest in the rights, had been acquired for actual consideration at an earlier time.

  1. If Ms Murder acquired the rights that she held on date 1 for actual consideration then the exemption would not be available to any of the people in the example. It would not matter if the various interests in the rights held between dates 2 and 5 had not been acquired for actual consideration, since each is directly or indirectly derived from rights that had been acquired for actual consideration. Neither would it matter whether Mr Sour gave actual consideration, since the rights would have been acquired by a person, Ms Murder, for actual consideration at an earlier time.
  2. However, assume Ms Murder took out the policy herself. And the only time actual consideration was ever given was when Mr Doll acquired his interest in the rights on date 2. Then he, his sisters and Mr Stone would not benefit from the exemption. Although no actual consideration was given for the interests acquired by the sisters or Mr Stone, these were derived directly or indirectly from Mr Doll’s interest that had been acquired for actual consideration. But the interest in the rights Ms Murder had from date 2 onwards would continue to qualify for the exemption, since that interest was derived from only the rights themselves, which had not been acquired for actual consideration. Mr Sour’s rights would not qualify for exemption, since an interest in those rights (in this instance, Mr Doll’s interest) had been acquired for actual consideration at an earlier time.
  3. If the only time actual consideration was given was when the three sisters acquired their interests in the rights, then exemption would not be due to the sisters who gave actual consideration. Nor would it be due to Mr Stone if either of the sisters from whom he received his interest in the rights had given actual consideration. Nor to Mr Sour, for the same reasons as at (b) above.
  4. If the only time actual consideration was given was when Mr Stone acquired his interest in the rights then only he and Mr Sour would not benefit from the exemption.
  5. If no actual consideration was given until Mr Sour acquired the rights then the exemption would be available on all the earlier disposals - the exemption would not be due when Mr Sour made a disposal of his rights.