Lifetime transfers: gifts with reservation (GWRs): insurance policies: policies made before 18 March 1986
As a general rule, the GWR rules do not apply to gifts made on or after 18 March 1986 under the terms of a policy issued in respect of an insurance made before that date.
However, the rules may apply if the policy is varied on or after that date.
The gift has to be made under the terms of the policy. Accordingly, if the donor pays an amount equal to the insurance premiums to the trustees who in turn make payment to the insurance company, there is nothing to which FA86/S102 (6) can apply. Refer to Technical in such cases.
If a pre 18 March 1986 policy is varied on or after that date, all premiums paid after 17 March 1986 (not just those paid after the variation) are subject to the GWR rules.
Subject to the very limited exception where there are automatic increases (IHTM14434), a policy is said to be varied if
- on or after 18 March 1986
- its term is extended, or
- its benefits are increased.
For this purpose any change in the terms of the policy which is made in pursuance of an option or other power conferred by the policy is deemed to be a variation of the policy.
On 1 January 1980 Robert effected a life policy on discretionary trusts under which he was an object. He paid the annual premium of £1,000 each year from 1 January 1980 until 1 January 1995. He died on 1 April 1995 and the sum of £32,000 became payable under the policy.
Although Robert was a potential beneficiary under the trust, no GWR claim arises on the death because of FA86/S102(6). However, had the policy been varied within the meaning of the subsection on 1 May 1989 there would be a GWR claim referable to the premiums paid after 17 March 1986.
Distinguish variation of a policy from a new contract
The exercise of an option may result in a new contract or policy. Where this happens on or after 18 March 1986, the new contract or policy will be on or after that date and you can apply the normal GWR rules.
Before 18 March 1986, Jack effected a whole life policy on discretionary trusts under which he was an object. The policy contained an option to effect a second policy (which would be held on the same trusts) after three years without further evidence of health. The option was exercised on 1 January 1987 and Jack paid the premium on that policy and the original policy until his death two years later.
On the footing that the exercise of the option made no change at all to the terms of the original policy, that policy will not have been varied within the meaning of FA86/S102 (6). The policy which was created as a result of the exercise of the option and which was held as an addition to the trust fund is, however, a new policy which, having been effected after 17 March 1986, will be chargeable as a GWR.