IPTM3240 | Person liable to charge: death cases

Policies and contracts not held on trust

Cases where deceased is liable

In most cases, the person insured under a life insurance policy or life annuity contract is the same person as the beneficial owner of the rights under the policy or contract within the chargeable event regime. Those rights are 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. If applicable, top slicing relief can be claimed when calculating the tax liability for the deceased.

If the deceased was liable for income tax on a chargeable gain where death brings the policy to an end, the net proceeds represent capital not income of the estate. There is no further income tax charge for the beneficiary because any distribution does not represent estate income.

Cases where gains are realised by the personal representatives

Where the insured person is different from the beneficial owner, or the policy is a capital redemption policy, the policy will continue to run following the death of the beneficial owner and it will pass into the estate of the deceased.

There are two possible treatments of chargeable event gains (IPTM3400) incurred by personal representatives of the estate, depending on whether basic rate is treated as having been paid (IPTM3810):

1. Gains which are not treated as though basic rate tax had been paid on them

The personal representatives should report these gains on a Trusts and Estates Self-Assessment return as follows:

• Gains from UK policies should be reported in box 9.14 of SA900.

• Gains from offshore (foreign) policies should be reported in box 4.6 of SA904.

The gains are charged under s466 ITTOIA05 as savings income at basic rate in the hands of the personal representatives. Top slicing relief is not available to personal representatives.

The personal representatives can use box 17 on R185 (Estate Income) to give the beneficiary the details of the income received and tax accounted for.

For the beneficiary, the income falls under s664(2)(a) ITTOIA05 and, by virtue of s680B ITTOIA05, is treated as savings income. The beneficiary’s savings rates and allowances apply as appropriate. This amount of estate income does not retain any characteristic for the beneficiary, other than "savings income", so top slicing relief is not available for the beneficiary.

The beneficiary will receive credit for the basic rate tax previously paid by the personal representatives, so there will be no further tax payable unless they are a higher or additional rate taxpayer. A beneficiary in Self-Assessment should report the income at box 17 of SA107.

The beneficiary may claim a repayment if they are a non-taxpayer.

2. Gains on which tax is treated as paid

These gains are not taxable income for the estate. The personal representatives have no further tax to pay and should not show the gain on SA900 or SA904.

For the purposes of determining the beneficiary’s income the gains form part of the aggregate income of the estate by virtue of s664(2)(e) ITTOIA05. The amount is grossed and a tax credit applied at the basic rate. It is not treated by s680B ITTOIA05 as savings income for the beneficiary.

The personal representatives can use box 19 on R185 (Estate Income) to give the beneficiary details of the income received and tax already accounted for.

There will be no further tax payable by the beneficiary unless they are a higher or additional rate taxpayer. A beneficiary in Self-Assessment should include this estate income at box 19 of SA107.

The tax credit is not repayable if they are a non-taxpayer.

Policies and contracts held on trust

The general rules relating to policies held on trust are described in IPTM3250. Where a policy is held on trust, the settlor of the trust will normally be chargeable if still available to charge. A settlor who dies may in some cases be chargeable on an event occurring after death, for example where the policy held by trustees is on the life of someone other than the settlor and continues following 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.

Where the gain arises on an event after the end of the tax year in which the settlor died, the trustees will be taxable on the gain, subject to the transitional provision for policies in existence before 17 March 1998 which is described at IPTM3230.