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HMRC internal manual

Inheritance Tax Manual

Life Policies: life policy linked with a loan and inheritance trusts: reverse loan scheme: how the reverse loan scheme typically worked

​In the reverse loan scheme the steps taken would often be along the following lines

  • The transferor effected a single premium policy and put it into settlement for the benefit of others. The premium would be quite large but usually less than the current nil rate band. So there would be no immediate charge to tax and if, as expected, the transferor survived seven years, the gift dropped out of cumulation.
  • Over time the value of the policy would increase. Each year the trustees would make partial surrenders of the policy and lend the proceeds back to the transferor.
  • On the death of the transferor the aggregate of the loans plus interest would be deductible against the death estate.