A gift inter vivos policy is set up with cover of £200,000 in the first year....? -

A gift inter vivos policy is set up with cover of ￡200,000 in the first year. How much cover will apply in the final year of the policy? A. ￡34,000 B. ￡40,000 C ￡80,000 D ￡120,000 I know the answer but I am interesed in the working out. How did u get to your answer? To understand Inter-Vivos you have to realise what a PET is. If someone gives a gift to another person this is a Potentially Exempt Transfer (PET). If the first person dies then the second person incurs a tax liability of 40% - this liability gives them an insurable interest in the life of the donor. In this case the gift must be ￡500,000. However each year that the donor lives after giving the gift reduces the liability to pay tax until after 6 years there is no liability remaining - the gift is tax exempt. The insurable interest therefore decreases by a sixth each year until in the final year it is a sixth of the original liability. Thus an inter-vivos insurance policy is a decreasing term policy on the life of the donor by the recipient for the tax liability on the death of the donor.