Q. My brother (who was single) died recently, leaving his estate to me (his only sibling) and my two sons. By far the biggest asset in his estate is his house, which was mortgaged. I also stand to benefit from a life assurance policy that my brother had written in trust for me, which he intended to be used to repay the mortgage on his property. However, a friend has told me that, due to a change in legislation, if I use the proceeds of the life assurance to repay the mortgage then that mortgage debt cannot be deducted from the value of my brother’s estate and, thus, I face the prospect of having to pay a significant inheritance tax bill. Is this correct?
A. First, I am sorry to hear of your loss.
The Finance Act 2013 introduced new limitations on the deductibility of certain debts. The provisions primarily were intended to counter tax avoidance schemes but have, inadvertently, affected “ordinary” people including those who have written into trust life assurance/mortgage protection policies intended to repay a debt upon their death.
Before the introduction of the Act, debts such as a mortgage could be deducted from the value of a property when calculating the value of a deceased’s estate for the purpose of assessing the amount of inheritance tax (“IHT”) due on that estate, thus reducing the value of the estate and the amount of IHT payable.
However, the changes introduced by the Act mean that a mortgage can only be deducted from the value of an estate if the debt is repaid from the estate of the deceased. A life assurance policy/mortgage protection that has been written in trust is outwith the deceased’s estate and if the property is passed to the next generation still encumbered by the mortgage, which is subsequently repaid using the proceeds of the life assurance/mortgage protection policy, the debt would not have been repaid out of the estate and therefore is not deductible for the purpose of valuing the deceased’s estate.
Consequently, those beneficiaries of people who have written such a policy in trust (and whose estates do not have sufficient funds with which to repay a mortgage) may now face an increased IHT liability.
HMRC is aware of this apparent unintended consequence of the introduction of the Finance Act 2013 and has issued draft guidance which it is anticipated will be added to HMRC’s IHT Manual. This guidance states that if the executors borrow money to repay the original mortgage, so that the beneficiaries receive the property encumbered with the new debt, HMRC will consider the original money to have been repaid from the estate. Furthermore, the executors are able to take such a loan from the beneficiaries (for example, the beneficiaries could use the proceeds of the life assurance policy to advance a loan to the executors).
Therefore, provided that the correct procedures are followed, you may still be able to benefit from the tax-efficiency of your brother having written his life assurance policy in trust and be able to deduct the value of his outstanding mortgage from the value of his estate.
I recommend therefore that you seek advice from a solicitor who specialises in estates to ensure that you follow the correct procedures and administer your brother’s estate in a tax-efficient manner.
Q. I have heard a rumour that the Chancellor, George Osborne, is set to reduce the maximum amount I can save into a pension to £1.25m when he delivers his forthcoming Autumn Statement. Is this correct?
A. Not exactly.
You are correct that the Lifetime Allowance (the maximum amount a person can save into a registered pension scheme in their lifetime) is set to be reduced from £1.5m to £1.25m. However, this reduction (which will take effect on 6 April 2014) was announced in last year’s Autumn Statement.
Similarly, the Annual Allowance (the maximum amount a person can save into a registered pension scheme in any given year) is set to reduce from £50,000 to £40,000. The reduction, announced last year also, will take effect from 6 April 2014.
I have not heard any rumours that either or both of the Annul Allowance or the Lifetime Allowance will be reduced as part of the Chancellor’s Autumn Statement (scheduled for 4 December, but which has been rumoured will be delayed by one day). Indeed there has been a great deal of lobbying by the pensions industry and business representatives to discourage the Chancellor for making further changes to the pensions taxation legislation. However, one cannot state categorically that further changes will not be made.
If you think that you may be affected by the forthcoming reductions to the Lifetime Allowance and/or the Annual Allowance, there are measures that you can take in order to avoid a punitive tax charge. In those circumstances, I recommend that you seek assistance from a chartered financial planner, who specialises in retirement planning, asap.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
