Life Insurance Articles
The 2006 Spring Budget changed the treatment of some life policies written in trust. This article explains the tax position unveiled by the Finance Bill.
Life Insurance. How the new regulations affect policies written in trust.
Mel Varley 22/01/06
In his spring Budget the Chancellor Gordon Brown announced swinging measures to tackle the use of Trusts being used to avoid Inheritance Tax. The immediate reaction amongst the financial and legal fraternity amounted to panic and confusion. Within ten days of the budget speech the estimates of the numbers of people that could be hit by the new anti-trust provisions hit 4.5 million.
Then, following the publication of the draft Finance Bill, the estimates fell to 1 million people. So, with specific reference to life insurance policies written in trust, what's happening?
Well firstly before we go any further, we have to make the point that this article is commentating on the position based on the first draft of the Finance Bill and it'll be early July 2006 before that bill becomes law. As I write, the legislation still has to pass through parliament and it's possible that the situation could change yet again. If it does I will keep you informed.
Within weeks of the budget speech, the Government retreated from its previously held position that all life policies written in trust are caught by the new legislation. The current position is that if your life insurance policy was written in trust before budget day 2006, then the money in the trust remains totally free of tax and fees. The legislation is not now to be retrospective. That's one headache dispensed with.
However, if your policy was written in trust after the Spring Budget Day in 2006, then the new tax rules do apply.
For most people, the purpose of writing a life insurance policy in trust is to ensure that the policy pays out quickly and directly to where you want the money to go often to a mortgage provider to repay the mortgage or to beneficiaries in the family to allow them to spend straight away as they like and tax free. These trusts that break upon death, are not now affected by the new regulations. That's because only trusts that continue to hold money after the policyholders' death are targeted by the new rules.
New life insurance policies written in trust will now be caught by a tax charge if the policy's payout makes the deceased's estate exceed the Inheritance Tax Threshold (IHT) of £285,000 and the policy is written in a type of trust known as an interest-in-possession trust.
Interest-in-possession trusts have been used to hold and invest the money paid out from a life insurance policy and pay the trust's income to the spouse. The capital then passes to the children on the death of the spouse. Following the budget, these arrangements will be subject to a 40% IHT charge when then money passes into the trust for your spouse - plus a 6% tax charge every ten years and an exit fee. These taxes can be avoided if the you give your spouse significant control over the trust, which many people may perhaps not want to do especially if they are in a second marriage with children from previous relationships. The alternative is to use a bare trust as this type of trust is not caught by the new regulations. However, if you do use a bare trust, the money automatically goes to your children when they reach the age of 18.
If you are buying a new life insurance policy and want to use it to pay off a mortgage or provide immediate money for your family if you were to die, then you should still consider writing our policy in trust. However, it becomes more important than ever to buy the policy through a broker who is fully versed in the current requirements for trusts and can ensure you get exactly the type of trust you need.
Readers please note : You should undertake your own background checks before taking any action on any aspect mentioned in this article. Where the author has mentioned specific product details or given examples of how companies have reacted to specific situations, these should be correct as far as the author is aware when this article was written. In some cases additional background information not mentioned in the article has been used in obtaining the examples. Some examples or quotes may have been taken from information available in the public domain where all the background details may not be available. Insurers do change policy conditions and underwriting approach. They will view each situation on its own merits.
You should be aware that details of the topics written about within the articles can change. Therefore, always check out the current position before taking any action. You should also check that any action you are considering, or any proposed purchase, is suitable for your personal circumstances.This article represents the author's personal views and is not necessarily endorsed by this web site. These articles should not be construed as this web site recommending any product or service.