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HMRC internal manual

Inheritance Tax Manual

From
HM Revenue & Customs
Updated
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Lifetime transfers: gifts with reservation (GWRs): insurance policies: automatic increases in policy value

The limited exception to the definition of variation concerns policies conferring an option or other power to increase benefits and premiums in line with the retail prices index or any similar index specified in the policy.

In such cases,

  • to the extent to which the right to exercise the option would have been lost if not exercised on or before 1 August 1986
  • the exercise of the option before that date is not treated as a variation for the purposes of FA86/S102(6).

It has been agreed that the Average Earnings Index is a ‘similar index’ within the meaning of FA86/S102(7).

Refer any enquiry as to whether any other index will be treated similarly or any other difficulty with the scope and interpretation of either S102(6) or (7) to the Actuarial Team.

Example

On 1 January 1980 Carmela effected a life policy on discretionary trusts under which she was an object. Carmela paid the annual premium each year from 1 January 1980 until 1 January 1995. She died on 1 April 1995 and the sum of £32,000 became payable under the policy.

Under the terms of the policy there was an automatic increase in the sum assured on each policy anniversary unless the insurance company received a written request to the contrary from the policyholder. No such notification was sent during Carmela’s lifetime and the sum assured was increased annually throughout its term.

The automatic increase in the sum assured is not considered to be a variation within FA86/S102(6) even though Carmela could have prevented the increase from taking effect. On the other hand, had the policy provided for an increase in the sum assured if a written request to that effect was made by the policy holder, the making of such a request would have amounted to an exercise of an option under S102(6).