Life policies and Inheritance Tax
A life policy is a contract with an insurance company. In exchange for premium payments the insurance company provides a lump-sum payment to beneficiaries if the policy holder dies during the terms of their policy. There are various types of life policies available. The main types are 'term', typically covering a set period of time or 'whole of life', meaning that they are active until death.
The policies are often used as Inheritance Tax mitigation and avoidance devices. HMRC is clear that where a person transfers a policy to another, its value at the date of transfer may be taxable as a gift. If a person takes out a policy for the benefit of another person, the cost of effecting the policy will also be taxable as a gift. Similarly, if they pay the premium on a policy owned by somebody else, the amount of the premium considering any exemption due may be a Potentially Exempt Transfer or a chargeable transfer.
When the life assured dies, the proceeds of the policy will be payable to the person who owns the policy or to some other person specified under its terms. In cases where the beneficial owner of a life policy dies before the life assured, there will be a transfer on their death of the life policy with the other assets in the estate.