Person liable to charge: summary of the position in relation to trusts
It is quite common for insurance policies to be held on trust, and not only in complex planning circumstances. For example, in the case of a married couple, Fred and Joan, Joan might take out a policy on her life and have it written in trust for Fred and their children to assist with child care should she die. Joan is the settlor and if a chargeable event gain should arise on her death, she through her personal representatives would be chargeable as the settlor. It would not be the personal representatives’ gain.
It follows, however, from the discussion at IPTM3220 and IPTM3230, that where a policy or contract is held on a UK resident trust there are three possibilities. Where the trustees are non-UK resident see IPTM3260.
Rights held on a bare trust - beneficiary chargeable
Here the beneficiary is absolutely entitled as against the trustee and the rights are vested in the beneficiary as beneficial owner. The bare trust is ignored and the beneficiary is chargeable by virtue of ITTOIA05/S465 (2). This applies equally where the beneficiary is a minor - however, in line with practice generally prevailing for life insurance policies, settlors remain liable for income tax on chargeable event gains arising for years up to and including 2006/07.
Rights held on trust - settlor/creator chargeable
This is the common case of a non-charitable trust where the settlor is not ‘absent’ as described at IPTM3230. The settlor is chargeable by virtue of ITTOIA05/S465 (3).
‘Settlor’ or ‘creator’ of a trust has a wide meaning and includes any person who settles property on the trust. So, for instance, where a person pays sums to the trustees to use as current or future premiums for a policy held in the trust, that person is a creator of the trust.
Rights held on trust - UK trustees chargeable
This covers the situation of a
- charitable trust
- non-charitable trust with absent settlor
- non-charitable trust where ‘absent settlor’ does not apply but there is no individual, company or personal representative who is liable to the charge.
In these cases the trustees are chargeable by virtue of ITTOIA05/S467.
Where the policy is held on trust the first named trustee is likely to be the policyholder to whom the insurer will send the chargeable event certificate. Trustees are asked in the Tax Return Notes to forward certificates to the chargeable person where that is not themselves.
Further reference and feedback IPTM1013