Life Insurance.Life policies written in trust to be affected by new legislation.

Author: Anna RichardsonGordon Brown, Chancellor of the Exchequer, announced in his spring budget that there would be changes made to policy to bring the inheritance tax loophole related to life policies written in trust to an end. The industry quickly realised what this could mean – and within 10 days of the announcement it was estimated that 4.5 million people could be affected by any changes in policy. The draft Finance Bill was then published, bringing more details to light which enabled estimates of affected people to fall to 1 million people. In this article, we explain exactly what has been said so far, and what it will mean. To make it absolutely clear, only the first draft of the Finance bill has so far been released, and it is that that we are commenting on. The legislation has not been passed through Parliament yet and it is possible that the legislation will be turned down at that point. If it does go through, it won’t be law until summer 2006, sometime in early July. If the situation does change then we will let you know.After making the initial budget speech suggesting that ALL life policies written in trust would come under the new law, the government retracted and amended that to all new policies written after the budget date. So if your life policy was written in trust before budget day on 22nd March, then you don’t need to worry, your policy will still be exempt from inheritance tax. If your policy was still in progress and wasn’t completed until after March 22nd, then unfortunately you will be subject to the new tax rules, and you may not be exempt from inheritance tax. The reason why people usually choose to have their life policy written in trust is because the money can go directly to where it’s needed, for example to the mortgage provider to pay off the mortgage, or to family members so they can use the tax-free money immediately. The new legislation will not in fact affect these scenarios, because they come to an end with the death of the policyholder. It is only a certain type of trust called an ‘inheritance-in-possession’ trust that will be affected by the new tax laws. Policies written in trust after 22nd March 2006 will be affected by the new tax laws if both of the following two criteria are met:·the policy’s payout goes over the Inheritance Tax Threshold (IHT) of £285,000; and·the policy comes under the definition of an “interest-in-possession” trust. Interest-in-possession trusts are used to pay an income to the surviving spouse, rather than give a lump sum payout. The policy pays out a regular income and then, if the spouse dies, it continues to pay an income to the children. There are a number of charges that will now affect these trusts, including:·a 40 Inheritance Tax Threshold charge when the money is first put into trust; ·a 6 tax charge charged every 10 years; and·an exit fee.If the spouse is given the responsibility to have a high level of control over the trust then the taxes can be avoided, but we feel that some people may not be prepared to do this especially if they are in a second marriage and have children from other relationships. One alternative is a type of trust called a ‘bare trust’ which will not fall under the new legislation, however it does not pay an income for the whole of the policy, as soon as the children reach 18 they receive the full lump sum. If you are simply buying life insurance to cover a mortgage or to provide for your family in the event of your death, then having your life insurance written in trust is as viable as it ever was. However, this case does highlight the need to deal with a life insurance broker who is completely up to date with the latest legislation, to ensure that you get the best advice and choose the right type of trust for your individual needs.

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