Consumers are wrong to believe that existing life policy trusts are excluded from the changes to inheritance tax (IHT) contained in the Finance Bill. At the first meeting with the government since the Finance Bill was published, the Law Society confirmed that existing life policy trusts are not specifically excluded from the new regime.

Although widely reported in the press over the weekend that this concession had been made since the Budget Day announcement, the Society has clarified the actual position.

Kevin Martin, Law Society president, says: ”The Revenue has confirmed to us that the Finance Bill does indeed contain nothing on this. There is no specific exclusion for life policy trusts as has been widely claimed. Millions of wills and existing life policy trusts may be caught. It is an enormous task to review millions of wills but seeking legal advice is the only way people can be certain if they are affected.”

Amended explanatory notes published with the Finance Bill on 7 April indicate that all trusts of life policies put in place before Budget Day on 22 March are not affected by the new inheritance tax (”IHT”) regime for trusts in the Bill. The guidance note published by the Revenue on 7 April goes further, and says:

”In particular, no one who wrote a life insurance policy into trust before Budget Day will have to pay an inheritance tax charge. All of these continue to be exempt from inheritance tax as they were before the Budget.”

However, for existing, pre-22 March life policy trusts, the Revenue confirmed there is no blanket special treatment taking them outside the new IHT regime. The Law Society believes that this is a very important and helpful clarification. It affects everyone owning a life policy in trust, all the insurance companies issuing the policies, and all those advising on the policies and the trusts.

The position on existing, pre-22 March policy trusts is as follows:

1. The payment of ongoing premiums for life policies owned by trusts will not constitute ”additions” to those trusts so as to bring them within the new IHT regime. This is not because there is any provision in the Finance Bill but because the Revenue’s view of the general law is that the payment of the premiums is a continuing contractual obligation between policy holder and the life company in each case.
2. Any existing life policy trusts that are interest in possession (or life interest) trusts will continue to have their existing IHT treatment accorded to them until the interest of the life tenant comes to an end. This is the same position as that for all existing life interest trusts. But in many cases such life policy trusts will still need to be reviewed to take account of the new IHT regime that may apply when the life interest comes to an end.
3. Existing accumulation & maintenance trusts holding life policies are affected and will be within the new IHT regime and will need to be reviewed before the expiry of the 2 year transition period allowed by the Revenue.

Members of the Law Society’s Tax Law and Wills and Equity committees met with officials from the Revenue and the Treasury on Tuesday to discuss the new IHT regime changes to the inheritance tax treatment of trusts in the Bill and to highlight the wide implications for many families of the measures.

The Law Society, following its meeting with the Revenue and Treasury, will be submitting detailed objections to the new IHT regime for trusts as a whole as well as detailed comments on the draft legislation itself.

The Law Society regulates and represents the solicitors’ profession in England and Wales and has a public interest role in working for reform of the law.