Toby Johncox of Enness Global, a leading brokerage of high net worth (HNW) mortgages, and Carlton Crabbe, CEO of Capital for Life, a life insurance and premium finance company for clients HNW, offer advice on how life insurance can help protect your hard-earned wealth for yourself and for future generations.
What is life insurance and how does it fit into inheritance tax (IHT) planning
It is important to know that most countries in the world levy inheritance or wealth taxes. However, in places like the Middle East, they don’t have inheritance rights, so it’s something people in that region need to be familiar with when owning property in places like France, Spain, Portugal and the United Kingdom. Wealth tax is due when the owner of a property dies, so people should prepare for it to ensure they can pass their property on to their children or other beneficiaries. Inheritance tax levels and how it is charged vary from jurisdiction to jurisdiction, but life insurance can be used as a way to plan for wealth tax.
If we focus solely on UK property, prior to 2017 the usual form of wealth planning for UK property owners who were not domiciled, but potentially UK resident, was through an offshore trust or an offshore company. This saved them from having to pay UK inheritance tax on the property. Then in 2017 a new system was introduced called ‘de-development’ which, in a nutshell, meant that properties held in offshore trusts and offshore companies became fully exposed to UK inheritance tax. So life assurance has come into its own in recent years in particular, due to this need to cover UK Inheritance Tax, which after all allowances is charged at 40%. For example, someone who owns a £10 million London property held in an offshore company, or held in personal name, will be subject to an inheritance tax charge of nearly £4 million, which is a lot of money, and people should plan how to handle that.
General types of life insurance used for IHT planning
Generally speaking, there are two types of life insurance policies. There is a term policy, which is fixed for a fixed term, such as 7 years, 10 years or 20 years. You pay the premiums to the insurance company each year, which gives you or your family compensation if you die during this time. For example, you could have a 10-year term covering you for £4m, and that could cost you, say, £130,000 a year.
The other version is a whole life insurance policy that insures you for the rest of your life, regardless of when you die. A term insurance policy is usually there to ensure that you are covered for a specific period of time, such as the period of a mortgage, although there are advantages to having a life insurance policy as well. whole.
For estate planning purposes, someone should generally hold a life insurance policy within a trust. There are complex tax rules around this. If you are domiciled in the UK and resident in the UK, there is a set of rules. But if you are a non-domiciled UK resident, there is another set of rules. Everyone should hold a life insurance policy in a trust because you don’t want the policy to pay, say, £4m and then all of a sudden your estate has to pay duty estate on the £4m because the policy is part of your estate as well as the property. This does not solve the problem. So, generally speaking, people should hold an insurance policy in trust to ensure that children or beneficiaries benefit in a tax-efficient way from the payment of the policy. When a policy is in trust, it sits outside the bureaucratic paperwork of any kind of probate, so there is also peace of mind.
Annual Wrapped Dwelling Tax (ATED)
The other thing to consider is the ATED, which is the annual tax on wrapped accommodations. People have the option of paying for this if they wish, but, again, it can be expensive. One of the things to do is therefore a tax analysis to determine if it is cheaper to pay the ATED or to take out life insurance. On a large property of over £20million, for example, ATED currently sits at just under a quarter of a million pounds a year.
It’s fair to say that there have been a number of changes to the rules about how you can hold property in the UK and how tax is charged, so it’s best left to the tax experts. The one thing you can say about life insurance is that it’s non-litigious. And it is unlikely to be prohibited by law, as it provides a sum of money to the family or beneficiaries to pay the tax bill. From this point of view, it is a clean and simple solution to planning the payment of an inheritance tax bill.