Writing for Taxation magazine, BKL tax adviser Terry Jordan answers a reader’s query about dealing with the increase in valuation of a life assurance policy 15 years after death.
We have been asked to prepare a 2017/18 tax return for an estate. The individual died in 2003, but it has only recently come to light that there were two life assurance policies in his name. These were valued at £3,700 and £12,000 at the date of death but on encashment have realised £6,500 and £21,000 plus interest.
Generally, chargeable events are added to the income of the deceased in the year of death for tax calculation purposes. However, given that the event has happened so long after the date of death, would this still be correct?
And what happens to the increase in value since the date of death? Does that attract a separate tax charge or does it all fall back to that date?
I look forward to receiving Taxation readers’ assistance.
Query 19,140 – Estate.
Reply by Terry ‘Lacuna’ Jordan, BKL
An individual died in 2003 owning two life assurance policies. Apparently, the policies were not encashed until 2017-18 but the reason for the delay is not clear. The relevant legislation is in ITTOIA 2005, Pt 4 ch 9 s 461 et seq. As set out in HMRC’s Insurance Policy Taxation Manual, in most cases the life insured under a life insurance policy or life annuity contract is that of the beneficial owner of the rights under the policy or contract within the chargeable event regime. Those rights are then extinguished by the death of the insured person and any chargeable event gain is that of the deceased person, not that of the personal representatives as such, although they administer the affairs of the deceased person.
If the insured person is different from the beneficial owner, or the policy is a capital redemption one, the policy will continue to run after the death of the beneficial owner and will pass into the estate of the deceased. Any chargeable event gain arising on the continuing policy or contract is treated as income of the estate and the personal representatives will be liable to tax on those gains.
If a policy is held on trust, the settlor will normally be chargeable if they are still available to charge. A settlor who dies may in some cases be chargeable on an event occurring after death. This could occur if the policy held by trustees is on the life of someone other than the settlor and continues after the settlor’s death. When a chargeable event occurs after a UK resident settlor’s death, but before the end of the tax year, the gain will be chargeable as part of the total income of the deceased settlor for that tax year.
If the gain arises on an event after the end of the tax year in which the settlor died, the trustees will be taxed on the gain, subject to transitional provisions for policies in existence before 17 March 1998.
Let’s say the trust and the policy were in existence before 17 March 1998, at least one of the creators was an individual, and one of them died before 17 March 1998. As long as the policy has not been varied on or after 17 March 1998 to increase benefits or extend its term, there is no charge on the trustees and no charge on the settlor as long as the chargeable event occurs in a tax year later than that of the settlor’s death (see ITTOIA 2005, Sch 2 para 112).
Accordingly, it would be necessary to establish the exact facts of the case to determine who is liable.
If relevant, the values for inheritance tax purposes would be £3,700 and £12,000, not the higher figures subsequently realised.
This article is also available on the Taxation website.
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