Alternative solutions for protecting your wealth

Toby Johncox, head of mortgage sales at Enness Global, the world's leading brokerage of high net worth (HNW) mortgages, commercial property finance and property development finance, in conversation with Carlton Crabbe, CEO of Capital for Life, a life insurance and premium financing firm for HNW clients.

Toby Johncox 

Today, we'll be talking about the use of life insurance as a form of planning to help you protect the hard-earned wealth that you've generated for yourself and for future generations. And so Carlton thank you for joining me today. It's much appreciated. So let’s start by talking about what life insurance is and where it fits in the Inheritance Tax (IHT) planning world.

Carlton Crabbe 

Most countries in the world charge inheritance tax or wealth tax so that's one of the things to be aware of. However, in places like the Middle East they don't have inheritance tax so this is something people from that region have to get used to for properties held in places like France, Spain, Portugal, and of course, the UK. Wealth tax occurs on the death of the owner of a property so I’m talking today about how to help those clients; how to prepare to make sure that they can pass on the assets of their property to their children or their beneficiaries if they want to.

Toby Johncox 

The levels of inheritance tax, the various ways it's charged, varies jurisdiction to jurisdiction and so why would you use life insurance as a way of planning for wealth insurance for wealth tax?

Carlton Crabbe 

Life insurance has really come to the fore over the past few years. If we just focus for a moment on UK property up until 2017, the usual form of planning for holding UK property for non-domiciled, but potentially UK resident, was through an offshore trust or an offshore company. This avoided them having to pay UK inheritance tax on the property. And then back in 2017, we had what's called “de-enveloping”, which is one of those great UK tax terms.

What does that mean? It just means that you have to pay tax.

In summary, that meant that in 2017, properties that were held in offshore trusts and offshore companies became fully exposed to UK inheritance tax. So life insurance came to the fore over the past few years in particular, because of this need to cover the UK inheritance tax position, which after all the allowances is charged at 40%. For example, someone with a 10 million pound London property held in an offshore company, or held in personal names, that's still going to be charged now. That’s an inheritance tax charge of 4 million pounds against a 10 million pound property. So it's a big chunk of money, and people should plan for it.

Toby Johncox 

So what are the general types of life insurance that one might look to take out?

Carlton Crabbe 

Broadly speaking, there are two types of life insurance policy, there's a term policy, which is fixed for a set amount of time, for example, 7 years, 10 years, 20 years. You pay the premiums to the insurance company every year, and that gives you a benefit, or your family a benefit, if you should pass away. For example, you might have a 10 year term covering you for 4 million pounds, and it might be costing you, as an example, 130,000 pounds a year.

The other version is a whole of life policy and that is insuring the rest of your life. That 4 million pounds is going to be insured whenever you pass away. The upsides of the whole of life insurance policy is it will cover you until the day you pass away whenever that is. Term insurance policy is generally there to make sure that you're covered for a specific period of time. That might be the period of a mortgage so you would typically take out a 5 or a 10 year term policy, although later we'll see that there are benefits of having a whole of life policy as well.

Toby Johncox 

Can you hold the life insurance policy within a structure? Is there a normal way of taking that insurance?

Carlton Crabbe 

For all estate planning purposes, somebody should typically hold a life insurance policy inside a trust. There are complex tax rules around that. If you're UK domiciled and UK resident, there is one set of rules. And if you're a non domiciled, UK resident, there is another set of rules. So everyone should hold a life policy inside a trust. Because what you don't want is the policy paying out, let's say, 4 million pounds, and then all of a sudden your estate has to pay inheritance tax at 40% on the 4 million pounds because that's inside your estate as well as the property. That doesn't solve the problem. So broadly speaking, people should be holding this in trust to make sure that the children or the beneficiaries benefit in the right way from the policy payout.

Toby Johncox 

With it being in trust there’s a speed at which things can be organised and it sits outside of the bureaucratic red tape of any sort of probate. So there’s peace of mind holding it in the right structure.

Now about the “de-enveloping” you mentioned, in 2017 the rules changed. It comes up all the time in conversations that I'm having with clients, they don't even realise that such a thing exists, but also because 5, 10, 20, 100 years ago whenever they bought the property and put it into a structure they were given advice that this is how to protect yourself from the inevitable tax issues. And the “de-enveloping” in simple terms is just moving a property or an asset held in a company into your personal names. And you would then take a insurance policy, which you can do either in the company or in the personal name. But is taking it out in the personal name more efficient? How does that exactly work?

Carlton Crabbe 

The other acronym is ATED, which is the annual tax on enveloped dwellings. So you've got a choice of paying that if you'd like to but, again, that can be expensive. So one of the things worth doing is a tax analysis. Is it cheaper to pay the debt? Or is it cheaper to take out a life insurance policy? On a large 20 million pound plus property, for example, ATED currently is sitting at just below a quarter of a million pounds a year. It's fair to say that there's been a number of changes of rules around how you are holding property, and how taxes charged on it. It's a moving feast, and best left to the tax experts. The one thing you can say about life insurance is it's non contentious. And you can't really ever see it being legislated against because it provides a big lump of cash for the family or the beneficiaries to pay the tax bill. So whichever way you look at it, you can't see the government saying: No, we won't accept life insurance as a payment for the tax that you owe. So we think from that perspective, it's a clean and straightforward solution.