Question; I have been advised to place my life insurance policy into a trust; why is this?
There are several reasons why some life insurance or assurance policies might be placed into a trust. Generally, they are to do with avoiding tax liabilities or ensuring that the proceeds of a policy will reach the intended recipient.
About two-thirds of people in the UK do not have a valid will and testament and die intestate, which is the term for an estate which does not have a valid will to determine where and how the estate proceeds will be divided up (sometimes there is a will in place which is no longer accurate and can be invalid for this reason too).
In this case, complex rules govern who receives the estate (the laws of intestacy), which could leave the proceeds of a life insurance policy to unintended recipients.
A good example is an unmarried couple who has arranged a life policy on the life of a breadwinner to repay the mortgage in the event of death. In this case, if there were no valid will in place, the proceeds would likely be passed on to the deceased person’s family; rather than the surviving partner, which could include children from a previous marriage, or the deceased person’s parents, for example.
That scenario could realistically lead to someone losing their family home.
In another scenario, a life policy intended to pay out to a couple’s children on the second death; to cover inheritance tax liabilities; would also become part of their estate and be liable to inheritance tax itself. Something placing the policy in trust could avoid.
The rules around the taxation of trusts change regularly, and mortgage advisors will recommend a regular review of your circumstances. A policy written into a trust may one day be better off outside of it, so it is vital to check regularly that existing provisions are still the most tax-efficient and prudent arrangements.
If you have a life insurance policy you think may need to be placed into a trust or to speak further to an advisor, call 0345 4594490 for independent advice.
This is an interesting question for me as it crops up quite a lot; however, remember that borrowing from a bank is not the same as depositing money.
Firstly, on the reasons you should use small regional lenders, they are currently leading the market in terms of mortgage and savings rates, and you may well find their customer service slightly more endearing than the bigger banks.
Small building societies are releasing very competitive products currently, and there is little reason to shy away from them.
Were your mortgage lender to fail, though, there would be very little likelihood of the administrators coming around with repossession orders (if the law even permitted them to do so).
Selling all the properties in an entire loan book would be ludicrously complex and likely produce a much lower return than simply selling the book of loans to another institution, which is commonplace trading among banks and institutional investors.
Even if no buyer were forthcoming to purchase the loan book, the administrators would likely let the book run and pass administration to an outsourcing firm; again quite common.
The current UK government has made it clear that it will not allow any financial institution in the UK to fail, regardless of its size. The FSCS or Financial Services Compensation Scheme, currently does not discriminate between the size of institutions either, so as long as the provider is a part of this scheme and falls under UK regulation, your protection as a consumer is equal regardless of an institution’s size.
Question; What is a higher lending charge, and how does it affect me as a borrower?
A higher lending charge is a fee lenders may apply to loans over a certain percentage of a property’s value (or loan-to-value).
For example, a lender may impose an extra charge on borrowers who borrow more than 80% of a property’s value, or perhaps more than 85% etc.
Often the fee will be a percentage of the amount of borrowing that exceeds this threshold.
A typical example would be a 5% charge on all lending over 80% of the property value. In this case, if your home was worth £100,000 and you borrowed £90,000, you would pay 5% of the £10,000 over and above the 80% limit, giving a higher lending charge of £500.
It’s important to consider how the fee is calculated, for each lender. It could be based on the whole loan, meaning the fee could be considerably higher than the example above.
Another important consideration is what the lender does with the fee.
Some lenders charge a fee to increase their profit margin on these loans to cover potential losses if they have to sell properties below market value at auction.
If the lender uses the fee to buy insurance, though, often referred to as a ‘Mortgage Indemnity Guarantee’ (which insures the lender against such losses), in the event of you handing back the keys and the property selling at a loss, the insurer would then have the right to pursue you for their losses under the ‘right of subrogation’.
The FSA forced lenders to stop referring to these charges as ‘Mortgage Indemnity Guarantee’ fees because it was worried that this gave the impression that such insurance policies would benefit the borrower, as well as the lender; so be aware that if you pay this fee or have done in the past, it will not protect you from the lender or insurer pursuing you for any outstanding balances should the property have to be sold at undervalue after repossession.
One of the most bewildering and confusing items on any mortgage illustration must be the Annual Percentage Rate or APR listed on a product.
APR gives a comparative measure between various loans to show the overall cost of borrowing on an annual basis, taking into account a broad range of fees, not just the interest alone, as well as giving a more direct comparison of the impact of a daily calculation of interest versus other less favourable terms.
Now, that is a good thing where the calculation makes sense, but for mortgage products, in its current guise, it makes no sense at all.
A simple look at the best buy tables on our website will show you; a product far cheaper during its initial deal may have a much higher APR than a product with a considerably higher interest rate and identical fees.
That is because the APR is calculated over the whole lifetime of the loan and will include the reversion rate of the product after its initial term.
There are several reasons why this is misleading;
- Reversion rates are generally variable and are not linked directly to the Bank of England Base Rate. In two years a lender with a previously un-competitive reversion rate could lead the market and vice versa. Hence it is not a factor that should play a major part in the decision-making process.
- Generally, customers should remortgage regularly during the early years of their mortgage repayment to ensure a competitive interest rate, including the reversion rate after the initial mortgage term distorts the picture.
- A clever design can skew the figure. Lifetime trackers appear very competitive because they have no reversion rate, and refunding upfront fees affects the calculation but could cost a pretty penny if the loan never goes ahead.
APR is a system that was never really designed for mortgage contracts but has become a legal obligation when advertising them; due to the confused dual regulatory system; between the FSA and the Office of Fair Trading. APR makes some sense on unsecured loans and little in the mortgage market.
It is high time that dual regulation ceased and APR calculations either scrapped on mortgage contracts or replaced with something far more specific to the complex nature of a mortgage product.
Capital gains tax is liable for gains made on certain non-exempt sales of assets at a current rate of 18%.
Your main residence is effectively exempt from Capital Gains Tax through tax relief; however, any second home or investment property will become liable for Capital Gains Tax from the date it is no longer your main home.
So if you bought a property as a second home or buy-to-let, then it is liable from the date of purchase; whereas, if you bought a property as your main home and subsequently moved to a new property letting the old one, the old property becomes liable to Capital Gains Tax from the date of transfer.
However, there is a 36-Month leeway given, so you owe Capital Gains tax on the property from 36 Months after its transfer to a buy-to-let.
Losses and expenses are offset against any gain. So keep a record of all your costs as a landlord, including maintenance bills, but not including your mortgage costs (mortgage interest is offset against income tax).
That means it is also worth having some form of valuation on the property at or around its 36th month as a let property to establish the value at its date of becoming liable.
You also have a personal Capital Gains Tax threshold of £10,100 currently, below which no tax is due, so if you are married or in a civil partnership having the property held on a “joint tenancy” or “tenancy in common” basis will allow you to use both your tax thresholds up to £20,200.
To work out any tax owed, take the sale value of the asset, less any costs and applicable tax threshold, and the value at its date of becoming liable, then multiply by 18%.
So if you let a property worth £120K in 2005 and sold it this year for £150K with costs in the four years of £3k, then you would owe £30K less £3K, less £10,100 which = £16,900 taxable gain. Then multiply £16,9K by 18%, giving tax due of £3,042.
In the same situation for a married couple where the property was held in joint names, you would instead take the gain of £30K less £3K costs, and £20,200 tax exemption giving £4,800 taxable and tax owed of £864.
Capital Gains Tax is a complex area, and there are other factors which may affect your tax liability. Remember that taxation policy can change in each government budget.
For more information or to speak to a mortgage broker, call 0345 4594490. Seek independent taxation advice for an exact analysis of your tax liability and guidance on tax mitigation.
