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

2. 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.

3. Trusts: What’s in it for…all of us?

4. 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).

5. 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.

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

7. 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.

8. 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.

9. 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.

10. 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.

11. 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!

12. Finance Act 2013 s176

13. 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.

14. 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!

15. 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

16. 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)

17. £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

18. The essentials are unchanged

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

20. 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...

21. 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.

22. We’re here to help

23. Tools & ideas - sales tools
Our trust ‘picker’
Selecting the right form
Tools & ideas - sales tools

24. Our trust ‘picker’
Selecting the right form
Find the right trust

25. Our trust ‘picker’
Selecting the right form
Link to trust

26. Thank you