Pre-owned assets: insurance based products: business trusts and partnership policies
It is prudent business planning for businesses and partnerships to take out policies on each partner’s life solely for the purposes of providing funds to enable their fellow partners to purchase their share from the partner’s beneficiaries on their death. The partner is not a potential beneficiary of their own policy, so the POA charge will not arise.
However, in many cases, the partner retains a benefit for themselves, for example they can cash in the policy during their lifetime for their own benefit, should they leave the partnership. In such cases, even if the arrangement is on commercial terms so that there is no gift for inheritance tax, the trust remains a settlement for Inheritance Tax purposes and the POA charge will arise by virtue of FA04/Sch15/Para8.
The value of a partner’s, or settlor’s, interest in a policy will be their share of its open market value as at 6 April each year.
If the policies are term assurances, in the vast majority of cases the policyholder will be in normal health, and it is likely that the policy will have little marketable value so that the chargeable amount under FA04/Sch15/Para9 will fall below the de minimis exemption (IHTM44056). Therefore, a policyholder in normal health at the valuation date can reasonably assume that they will survive beyond the term of the assurance and that no POA charge will arise.
But, if the policyholder has been advised that their state of health casts doubt on their survival to the end of the term of assurance (in other words there is a realistic prospect of the policy paying out and therefore having a material market value at the valuation date) then an open market value will be needed to calculate the chargeable amount.