Life Insurance. How The New Regulations Affect Policies Written In Trust.

Summary: In his spring Budget the Chancellor Gordon Brown announced swinging measures to tackle the use of Trusts being used to avoid Inheritance Tax. The immediate reaction amongst the financial and legal fraternity amounted to panic and confusion. Within ten days of the budget speech the estimates of the numbers of people that could be hit by the new anti-trust provisions hit 4.5 million.

In his spring Budget the Chancellor Gordon Brown announced swinging measures to tackle the use of Trusts being used to avoid Inheritance Tax. The immediate reaction amongst the financial and legal fraternity amounted to panic and confusion. Within ten days of the budget speech the estimates of the numbers of people that could be hit by the new anti-trust provisions hit 4.5 million. Then, following the publication of the draft Finance Bill, the estimates fell to 1 million people. So, with specific reference to life insurance policies written in trust, what's happening? Well firstly before we go any further, we have to make the point that this article is commentating on the position based on the first draft of the Finance Bill - and it'll be early July 2006 before that bill becomes law. As I write, the legislation still has to pass through parliament and it's possible that the situation could change yet again. If it does I will keep you informed. Within weeks of the budget speech, the Government retreated from its previously held position that all life policies written in trust are caught by the new legislation. The current position is that if your life insurance policy was written in trust before budget day 2006, then the money in the trust remains totally free of tax and fees. The legislation is not now to be retrospective. That's one headache dispensed with. However, if your policy was written in trust after the Spring Budget Day in 2006, then the new tax rules do apply. For most people, the purpose of writing a life insurance policy in trust is to ensure that the policy pays out quickly and directly to where you want the money to go - often to a mortgage provider to repay the mortgage or to beneficiaries in the family to allow them to spend straight away as they like and tax free. These trusts that break upon death, are not now affected by the new regulations. That's because only trusts that continue to hold money after the policyholders' death are targeted by the new rules. New life insurance policies written in trust will now be caught by a tax charge if the policy's payout makes the deceased's estate exceed the Inheritance Tax Threshold (IHT) of