When someone is arranging a policy in their own name and its connected to a mortgage, there are some important benefits to consider when placing it into trust.
Joint life policies can be put in trust, however for the purpose of a mortgage it’s not a usual process.
If you have a joint life, first death policy, the benefit is automatically paid to the surviving party. However, if you have a single life policy, placing it into trust will help mitigate Inheritance Tax and will also ensure monies pass quickly to the chosen beneficiary.
Let’s use an example of how a trust could help. Our client has a single life policy and dies after 9 years into a 25 year term. The Life Cover (Sum Assured) of £499,000 is paid out from the insurance company on production of the death certificate and the value is then held in the Estate until Probate has been granted.
Probate is the process where all of the assets are calculated (including this life cover), less any lifetime gifts and gifts to charity and the total value is then offset against the IHT nil rate band, currently £325,000 in tax year 2019/20. (For the sake of our example, let’s assume this person is single as there are other considerations to be made for married couples). Probate is not a quick process and can often take months, sometimes even years, so in the meantime, there is still a mortgage to pay.
Writing this policy into Trust will ensure the life cover is paid directly to the chosen Beneficiary / Beneficiaries. By placing a life policy into Trust means it falls under the lifetime gift rules, so may be subject to a potential Inheritance Tax (40% in tax year 2019/20) if death happens within 7 years. In year 8, any proceeds will be free of any Inheritance Tax.
There are many different types of Trust we can use. A Discretionary Split Trust, sometimes referred to as Flexible Trust tends to be the best one to place a mortgage life policy into. This type of Trust is very flexible and you can change the Trustees and Beneficiaries at any time, as many times you’d like, which means it can change as your life alters.
Placing an asset into Trust is a legal document and once a life policy is in Trust, it cannot be taken out. We would advise you to seek professional advice before entering into such a plan.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.