Professional mortgage protection Peter Fox Adviser Development Manager February 2015 For advisers only

Learning outcomes Understand the part trusts can play in mortgage protection advice Understand how advising on trusts can be a differentiator for adviser businesses, increase persistency of cases written and generate new opportunities/clients Be able to explain some implications of legal and beneficial ownership in relation to joint life policies Be aware of the potential effect of the Finance Act 2013 s176 on deductibility of debts for the purposes of inheritance tax mitigation Understand how the HMRC has offered a planning route that avoids potential disadvantages relating to policies written in trust following Finance Act 2013 s176.

Trusts: What’s in it for…all of us?

Trusts Trusts can Protect your clients’ life cover from Probate delay For clients Trusts can Protect your clients’ life cover from Probate delay Intestacy problems Paying too much inheritance tax Provide control for funds to be managed for young children (or even adults).

30% 60% Trusts We started doing business in 2003 The benefits for you We started doing business in 2003 Of policies that started in 2004, what percentage of cases not in trust are still on the books? 30% And for policies written in trust? 60% Source: TRUST-7588-RM-Number of in-force plans and lives assured, Bright Grey, February 2015.

Fewer unprotected clients Trusts The benefits Which means: Fewer unprotected clients Fewer commission clawbacks ‘Protected’ earnings

Trusts In offering trust advice you Treat customers fairly The benefits for you In offering trust advice you Treat customers fairly Give holistic protection advice Establish your credentials as a protection adviser Create long-term protection clients Create opportunities to generate new business when using trusts.

Inheritance tax Joint policy owned by a married couple, one dies Practical implications Joint policy owned by a married couple, one dies No inheritance tax (inter-spouse exemption) But… Joint policy owned by an unmarried couple Or it’s jointly owned and the couple die together or soon after one another Possible inheritance tax at 40% on some or all of their life cover Remember the individual nil rate band is set to stay at £325,000 until at least April 2018.

Joint policies & inheritance tax Types of ownership If you have: Clients with joint life policies and one of them dies Provider pays benefit to the legal owner (the survivor) HMRC considers beneficial ownership and says: Survivor receives 50% as return of own beneficial interest Plus 50% as part of deceased’s estate No implications if married (inter-spousal exemption) If unmarried then possible additional inheritance tax.

Joint policies & inheritance tax Married couples Consider: They both die at the same time Or shortly after one another Probate, possible inheritance tax Use trusts with ‘survivorship’ clause Gives survivor access after 30 days Die together or within 30 days the sum assured is available for other beneficiaries Life policy outside estate for inheritance tax purposes Mortgage may still be used to reduce estate value if right steps taken.

Joint policies & inheritance tax Unmarried couples No inter-spouse exemption If no trust, 50% of the sum on first death is deemed to pass through the estate of the deceased so possible inheritance tax Use trust with survivorship clause Take care over repayment of mortgages and loans!

Finance Act 2013 s176

Deductibility of debts to reduce IHT Changes in Finance Act 2013 HMRC published guidance in s176 of the Finance Act 2013, which prevents executors deducting certain liabilities of an estate from its taxable value Before: most debts, e.g. mortgage would reduce inheritance tax liability After: debt only deductible if debt was repaid from assets within the estate If a life assurance plan is in trust, it’s outside the estate.

Possible result Plan written in trust and… Impact of the new stance Plan written in trust and… Proceeds are used to ‘directly’ repay a mortgage… The mortgage can’t be deducted from estate value No issue if married/civil partnership But, if the beneficiary is ‘partner’ or children then the full property value will apply for inheritance tax purposes No deduction for outstanding mortgage However, having created the issue, HMRC have provided a solution!

An example Couple not married – plan not in trust £700K with mortgage £200K Covered by mortgage protection His estate Personal assets £100,000 Share of property £350,000 Share of plan £100,000 Less share of debt £100,000 Net estate £450,000 Tax due £50,000

An example So what can be done? Couple not married – plan in trust £700K with mortgage £200K Covered by mortgage protection His estate Personal assets £100,000 Share of property £350,000 Less share of debt (not allowed) £0 Net estate £450,000 Life assurance plan for £200,000 in trust So what can be done? Paid to beneficiary who repays loan Loan not deductible – IHT payable on £125,000 (£50,000)

£40,000 saved by doing it in the right order! An example Couple not married – plan in trust £700K with mortgage £200K Covered by mortgage protection £40,000 saved by doing it in the right order! His estate Personal assets £100,000 Share of property £350,000 Less share of debt £100,000 Net estate £350,000 Life assurance plan for £200,000 in trust HMRC consider loan to have been repaid from within the estate – net estate now £350,000 – IHT £10,000 Executors repay mortgage and transfer estate to beneficiary with loan outstanding Paid to beneficiary who lends it to executors

The essentials are unchanged

Why use a trust? Right money, right hands, right time £   £  

Intestacy And what it could mean to your clients It’s not a problem if the policy is jointly owned and one dies But it could be if If they’re a single owner with no will Or both owners die and the last has no will...

Intestacy And what it could mean to your clients It might mean the spouse gets less of the life cover than they’d expect It leaves nothing to an unmarried partner It can leave undesirably large sums of money to young people which they can have outright when they become adults It can cause family disputes Use a flowchart that explains exactly what happens.

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