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HMRC updates guidance on IHT treatment of policies under seal


A“specialty debt” is a debt, contract or obligation that: 

  • is executed as a deed;  
  • is incurred under statute; or  
  • is a debt of the Crown.  

It is a long-established principle of the common law that the situs of a specialty debt (i.e. its location for legal purposes) is the place in which the document recording that debt is physically situated. 

By ensuring that the deed recording a specialty debt is physically stored outside the UK, it has therefore been possible to ensure that the debt itself will be treated as “excluded property” and so fall outside the scope of the charge to UK inheritance tax (“IHT”) for non-domiciled and non-deemed domiciled individuals.  For example, life insurance policies taken out by UK resident non-doms have often been executed by way of deed or under seal and held offshore to ensure that their proceeds should not be subject to IHT (for as long as they also remain non-UK deemed domiciled for IHT purposes). 

Historically, HMRC’s approach to specialty debts had followed the accepted common law position, however, in 2013, they abruptly changed their stance and revised their guidance to state that “many such debts are likely to be located where the debtor resides or where property taken as security for the debts is situated”. Although HMRC advised insurers that the position would revert to the previously held view in relation to life policies written under seal unless the arrangement is ‘artificial’, there has been no further communication on the point. This has left UK insurers – as well as resident, non-domiciled individuals who had previously taken advantage of the special treatment afforded to speciality debts - in a position of uncertainty.  

The promised update has now, however, finally emerged and the revised guidance (which can be found in the IHT Manual at IHTM27079, IHTM27080 and IHTM27104) confirms that: 

  • Where the speciality debt is secured on land or other tangible property situated in the UK, the situs of the debt will also be in the UK; 
  • Where the debt is not secured, the common law approach will generally be followed unless both the creditor and debtor are UK resident; 
  • Life policies executed by way of deed or under seal will be treated as situated where the deed is to be found provided that the policy holder is non-UK domiciled and there is no evidence to suggest the location of the policy documents has been artificially arranged;  
  • Lloyds policies will not be treated as specialty debts unless they also bear the witnessed personal signature of the General Manager of Lloyds Policy Signing Office; Lloyds policies that do not bear this signature are chargeable to IHT in the country where the debtor (the company) resides. 

The publication of the long-awaited guidance will be welcomed by insurers and affected policyholders. Policies effected with an overseas insurer are not, of course, affected by this guidance and will always be excluded property in the hands of a non-UK domiciled investor.

Please note that this document was prepared by a third party and as such Brewin Dolphin is not responsible for the content or able to answer queries on the topics dealt with. While we believe it to be correct at the time of writing, Brewin Dolphin is not a tax adviser and tax law is subject to frequent change. Therefore you should not rely on this information without seeking professional advice from a qualified tax adviser, who should also be able to assist you with any questions on the content.

This document was prepared as a general guide only and does not constitute tax or legal advice.