Life Policies: introduction to life policies: life policies and Inheritance Tax
Life policies are extremely flexible and, because they are linked to the survival of people are often used as Inheritance Tax mitigation and avoidance devices. Although the Inheritance Tax Act contains a number of anti-avoidance provisions aimed at policies, for the most part the charge to Inheritance Tax on policies arises under the ordinary charging provisions.
So where a person transfers a policy to another, its value at the date of transfer may be taxable as a gift. If a person takes out a policy for the benefit of another person, the cost of effecting the policy (normally the amount of the first premium) will also be taxable as a gift. Similarly if they pay the premium on a policy owned by somebody else the amount of the premium taking into account any exemption due, such as normal expenditure out of income (IHTM14231)) may be a Potentially Exempt Transfer (PET) (IHTM14024) or a chargeable transfer (IHTM04067).
When the life assured dies the proceeds of the policy will be payable to the person who owns the policy or to some other person specified under its terms. If the deceased is the life assured, the proceeds will form part of their free estate, so they will be taxable on their death. But in cases where the beneficial owner of a life policy dies before the life assured there will be a transfer on their death of the life policy with the other assets in the estate.
Settled policies are normally treated in the same way as other settled property.