In spite of these benefits, only a small proportion of life insurance policies are written in trust. Addressing this is simple and, in most cases, free. Life insurers can provide the necessary documentation to put a policy into trust, either when it is taken out or at a later date.
Mr Smart says this presents significant opportunities for advisers. “Different types of trust are available for protection so there is a need for advice,” he explains. “If it is a simple life insurance policy, a gift trust could work well, but if a client has a menu-based product a split trust will ensure they are still able to benefit from any payouts on critical illness or income protection.”
Another area where advice can be invaluable is where a policy with a large sum insured is placed in trust. Under the current rules, if this had a value – which would be the case if the policyholder were in poor health – any excess over £325,000 would be liable to a charge of 6 per cent on every 10-year anniversary of the trust.
Mr Smart says this possibility can be avoided by using the ‘Rysaffe principle’ at the outset. This involves the creation of a number of smaller trusts. “By setting up a series of trusts, each will benefit from its own nil-rate band, enabling a client to avoid this charge,” he explains. “It would be good to see this type of complexity removed in the OTS review.”
With so much on the wish list for the review, it is unlikely to be a simple process. And, while it may lead to less complexity around IHT planning, this will remain an important area for protection and financial advice.
BIG NUMBERS
£4.9bn
Inheritance tax receipts for the 2016/17 tax year (HMRC)
£325,000
IHT nil-rate band (2018/19)
40%
Standard inheritance tax rate, charged on the value of estate above the nil-rate band
301,769
Whole of life policies sold in 2016 (Swiss Re)
£109,652
Average sum assured on a new fully underwritten whole of life policy (Swiss Re)
£1,264
Average annual premium for new fully underwritten whole of life policy (Swiss Re)
