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HMRC internal manual

Inheritance Tax Manual

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Special trusts: life policies in A&M trusts

This guidance relates predominantly to the period before 6 April 08. After this date, rights to income after age 18 are not relevant to the requirements of IHTA84/S71.

Theoretically the decision in the case of *Bassil v Lister [1851] 9 Hare 177 *indicates that the use of trust income in the payment of premiums on life policies is not an accumulation within the meaning of the Thellusson Act.

It is now thought, however, that that decision is of doubtful authority and that it can be successfully challenged in the Court of Appeal if the need to do so arises. So, for the purposes of the condition in IHTA84/S71 (1)(b), you should treat a power to use income in this way as a power to accumulate, and so subject to the rules against excessive accumulations.

In the light of this, and of the judgement of the Court of Appeal in *Inglewoodv IRC [1983] 1 WLR 366 *the mere existence of a power to pay life policy premiums out of income may prevent a trust from satisfying the condition in S71(1)(a) because it renders it uncertain whether the beneficiary will acquire an interest in possession on or before attaining the specified age.

You may concede, however, that S71 is satisfied in cases where

  • the trustees agree that in the circumstances of the particular case, the power can be exercised only for purely administrative purposes of the sort illustrated above, or
  • they accept that the application of the rules against excessive accumulations precludes the exercise of the power after the beneficiary has attained 25, or
  • the powers of the trustees are subject to a general restriction if their exercise would infringe the conditions for relief.
  • You may also accept that the condition in S71(1)(a) is satisfied in cases where the beneficiary becomes absolutely entitled to all the settled property, including the life policy, on attaining the specified age, irrespective of the scope of the power and whether or not its exercise is restricted.

Despite the guidance to be found in the *Carver and Bosanquet *judgements, the law in this area is not entirely free from doubt. Accordingly, special care is needed in any case where there is an unrestricted power to effect a life policy and pay the premiums out of income if the beneficiary may become entitled to more than a limited interest in possession.

In such a case do not raise a claim under IHTA84/S65 (1)(a) on the S71 conditions becoming satisfied. Do not give any assurance that those conditions are satisfied, until the views outlined above have been explained to the trustees and until, as a result, they accept that in the circumstances of that case the power is purely administrative in character (or that, so far as it is not, it can be exercised only within the permitted period for accumulation).

Refer any case in which these views are challenged should be referred to TG.

You should note that the foregoing only applies to powers to effect life policies, and not to a power limited to effecting term policies for the protection of the settled property against possible future claims for tax (or additional tax) which may arise. Regard the premiums paid on any such policy effected by the trustees as payments of cost or expenses.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

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(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)