Its been a subject of great discussion ever since Gordon Brown announced in his spring budget speech that life insurance policies written in trust would be subject to new tax laws. At the time, he didnt go into any great detail and the industry was left to speculate on what it might mean. Taking the assumption that all life insurance policies written in trust would be affected, that would mean 4.5 million people across the UK would see their policies lose out to taxes. The story progressed a few weeks later when the draft Finance Bill was published, making it clear that not all policies written in trust would be affected, Estimations fell to one million people still quite a lot though! We provide you with the full low down in this article of what has happened so far on this issue. We must make it cleat first and foremost that nothing is law yet. We are talking about the first draft of the Finance bill which has not been taken into Parliament for discussion yet. It is assumed at the moment that if the new legislation is passed, then it will come into force in early July this year. If things change then we will give you the full details. The reason why the budget speech made such a huge impact is that it gave the impression that ALL life policies written in trust would not be able to claim their exemption from inheritance tax. The government put the story straight a few weeks later, saying that it was only policies written in trust after the budget date of March 22nd 2006 that would be subject to the new laws. So if you have a policy written in trust before that date then the new laws will not affect you. If your policy was written after the date of the budget, then you may be affected by the new laws, depending on what kind of trust you signed up to, which we will now discuss in further detail. The majority of life policies written in trust are done so as to provide a direct, tax-free payment in the event of their death, so it can go immediately to where its needed most whether thats straight onto the mortgage or to the family. These kinds of trusts will not be affected by the new tax laws because they pay out in full, so the policy comes to a complete end on death of the policyholder. Its a certain type of trust, called an inheritance-in-possession trust, that the government is specifically focusing on. These policies will be subject to inheritance tax if they go over the Inheritance Tax Threshold (IHT) of £285,000. They differ in that rather than paying out a lump sum, they pay an income to the spouse. If the spouse dies, the policy then pays the income to the children. At no point does it pay out a lump sum. These policies will be affected in the following ways: · an IHT charge of 40% when the funds are initially transferred into trust; · tax charges of 6% levied every 10 years; and· a fee to be paid when the policy is brought to an end.This kind of policy is very useful for people that have children from different marriages, enabling them to benefit from a tax-free income. The tax charges could be avoided by choosing another trust that allows the spouse to have more control over the way the funds are paid out, but this may not be suitable for some policyholders. One type of trust pays an income until the children reach 18, when pays out a lump sum – called a bare trust this is exempt from the new tax laws. So the new tax laws will not affect a huge number of policyholders. And we still advise those that want life insurance just to pay the mortgage off or pass a tax-free lump sum onto their family, to consider having the policy written in trust. We do advise anyone wanting to buy life insurance to deal with a good broker who knows and understands all the latest information before proceeding, there are many options to choose from and professional help is essential to make sure you get the right policy for you.
