Life Insurance. How The New Regulations Affect
Policies Written In Trust.
Policies Written In Trust.
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.
About The Author: Brokers Online (
http://www.life-assurance-bureau.co.uk/ )are one of the largest
personal finance sites in the uk, they specialise in Life
Insurance (
http://www.life-assurance-bureau.co.uk/life-insurance/ ).
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.
About The Author: Brokers Online (
http://www.life-assurance-bureau.co.uk/ )are one of the largest
personal finance sites in the uk, they specialise in Life
Insurance (
http://www.life-assurance-bureau.co.uk/life-insurance/ ).
