Revenue & Customs Brief 51/08

Life insurance policies held on bare trusts for minors

This brief is being issued to let life insurers, trustees, advisers and policyholders know about a change to the treatment of chargeable event gains arising on life insurance policies held on bare trusts for minors.

Under generally accepted practice, where a chargeable event gain arose on a life policy held in a bare trust for a minor, the gains were assessed to income tax on the settlor of the trust.
In the context of wider changes, guidance in HM Revenue & Customs (HMRC) Trusts, Settlements and Estates Manual TSEM1031 was clarified. This guidance confirmed that where a trust is a bare trust, the income belongs to the beneficiary even if the beneficiary is a minor. In this case, the persons liable to income tax on general income arising to the trust are the beneficiaries who are minors.
We subsequently took legal advice to clarify the implications for gains arising from life insurance policies. That advice suggests that in these circumstances, the generally understood and long-standing HMRC view (that settlors were the persons liable for income tax on such gains) was incorrect.

Our revised view is that regardless of the need for trustees to perform active duties on behalf of beneficiaries who are minors, those minors with an absolute entitlement to the trust income and capital have unimpaired beneficial ownership of life insurance policies held under a bare trust. In line with the general treatment of trust income for such beneficiaries, they are the persons liable to income tax on gains arising on the insurance policies held in trust on their behalf.
This view will apply from 2007-08 onwards.
Where either or both of the child’s parents are the settlors of the bare trust, they will in spite of this change of view potentially be liable to income tax on gains from a life insurance policy under the ‘settlements’ legislation which counters the income tax advantages of transferring property and/or income to minor children. Income for this purpose includes amounts deemed to be income for tax purposes such as chargeable event gains.

This change means that where the minor beneficiary has an absolute interest in the trust income and capital, the beneficiary rather than the settlor may be subject to tax, so those affected may need to complete or amend 2007-08 Self Assessment tax returns.

Guidance can be found in the Insurance Policyholder Taxation Manual (IPTM3250) and in the Trusts, Settlements and Estates Manual (TSEM1031 and 6321). Guidance on the settlements legislation as it applies to the income of minor children is at TSEM4300.

Issued 8 October 2008

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