Question; I have been advised that my life insurance policy should be written into a trust, why is this?
There are several reasons why certain life insurance or assurance policies should be written into trust and generally they are to do with avoiding tax liabilities and or ensuring that the proceeds of a policy will reach the intended recipient.
About two thirds of people in the UK don’t have a valid will and testament and die “intestate” which is the term for an estate which does not have a valid will in place 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 there are rules which govern how the estate is split which can often leave the proceeds of a life policy being paid out to someone who is not the intended recipient.
A good example is a couple who are unmarried and have arranged a life policy on the life of the main breadwinner to repay the mortgage in the event of death, in this case if there were no valid will in place the proceeds of the policy would likely be passed on to the deceased’s family rather than the surviving partner which could include children from a previous marriage or the deceased’s parents for example.
In another scenario a life policy which was written to pay out to a couple’s children on the last survivors death in order to cover inheritance tax liabilities would itself become part of the deceased’s estate, and therefore liable to inheritance tax itself if it were not written into trust.
The rules around taxation and particularly the taxation of trusts change regularly and this is one of the reasons why mortgage advisors will recommend a regular review of your circumstances. A policy once written into trust may well one day be better off outside of it and therefore it’s important to regularly check that existing provisions are still arranged in the most tax efficient and sensible manner possible.
If you have a life insurance policy which you think may need to be placed into trust or to speak further to a mortgage advisor call 0845 4594490 for independent advice.
Capital gains tax is levied on 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 at which 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, then the old property becomes liable to Capital Gains Tax from the date of transfer however there is a 36 Month leeway given so effectively you owe Capital Gains tax on the property from 36 Months after its transfer to a buy to let.
Losses and expenses can be set off against any gain, so keep a record of all your costs as a landlord including maintenance bills etc but not including your mortgage costs (mortgage interest is offset against income tax). This means it is also worth having some form of valuation on the property at or around its 36 month as a let property to establish the value of the asset 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 the 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, and it should be remembered that taxation policy can change in each government budget. For more information or to speak to a mortgage broker call 08454594490. Seek independent taxation advice for an exact analysis of your tax liability and guidance on tax mitigation.