How New Rules Affect Fiduciary Policy In Life Insurance

In his spring budget, Chancellor Gordon Brown announced far-reaching measures to address the problem of trusts used to evade property taxes. The immediate reaction in financial and legal circles was panic and confusion. Within 10 days of the budget speech, estimates on the number of people affected by the new antitrust rules reached 4.5 million.

Then, after the financial account was released, the estimates dropped to 1 million people. So what happens to a specific reference to reliable life insurance?

First, it should be noted that this article comments on a position based on the first draft of the finance law, and it will be the beginning of July 2006 for the entry into force of this law. At the time of writing, the law has yet to be passed by parliament and the situation may change again. If so, I’ll keep you updated.

 

Within weeks of the budget speech, the government abandoned its previous position that all life insurance policies held in custody would be subject to the new legislation. The current situation is that if your life insurance policy was blocked before Budget Day 2006, the escrow money remains completely tax free and tax free. The law no longer has retroactive effect. This is a headache.

However, if your policy was escrow after Budget Day 2006, the new tax rules will apply.

 

For most people, the purpose of life insurance in a trust is to ensure that the policy pays quickly and directly where you want the money, often to the mortgage lender to pay off the mortgage or to the family’s beneficiaries. allow them. they immediately spend what they want, without taxes. Those trusts that break after death are now unaffected by the new rules. Because only trusts that still hold money after the death of the policyholder are subject to the new rules.

 

New life insurance policies held in a trust are now taxable if the policy payment causes the deceased’s estate to exceed the Inheritance Tax (IHT) threshold of £ 285,000 and the policy is placed in a type of trust known as “withheld interest”. ‘ to trust.

 

The holding trust was used to hold and invest the money paid under the life insurance policy and to pay the trust income to the spouse. When a spouse dies, the capital passes to the children. According to the budget, these deals are subject to a 40% IHT fee when money is subsequently deposited for the spouse, plus a 6% tax rate every ten years and an “exit” tax. These taxes can be avoided by giving the spouse significant trust control, which many people may not want, especially if they are in a second marriage with children from a previous relationship. An alternative is to use a simple trust, as this type of trust is not covered by the new rules. However, if you use a trust fund, the money will automatically go to your children when they turn 18.

 

If you are taking out a new life insurance policy to pay off your mortgage or immediately provide money to your family in the event of your death, you should still consider taking out our escrow policy. However, it is more important than ever to purchase a policy from a broker who is familiar with today’s trust requirements and who can ensure you are getting exactly the kind of trust you need.