Kathryn Knowles  00:06

Hi everyone. It is season nine, episode nine, and today we’re going to be focusing upon gift planning and protection insurance. This is the practical protection podcast. Hi,

Kathryn Knowles  00:26

so as always, to be very clear, I’m a protection insurance advisor. I am not a full financial advisor. So when I’m talking about gift planning and things like that, I am just talking about on how we would be protecting it with life insurance. Overall, life insurance is a very simple, usually and effective way of protecting against the gift. And it was quite interesting. Recently, I was speaking to somebody, and they were saying that they needed to ensure themselves, to protect themselves against the tax. And I was just like, Oh no, no, no. This is all about the person who receives the money. So basically, whoever’s getting that that wonderful gift, they are the ones that would be charged with the tax if something was to happen to someone within a certain time frame from that gift. And what you can find as well is that a lot of people make gifts without realizing it. So you know, we see that, you know, in terms of full financial planning, you know, the gifting can often make quite a big part of the plan, and we’re often talking quite large sums of money at times. But what people don’t tend to realize, I’m going to speak in very sort of rough figures on some of this. So, you know, please don’t hold it to me if I get any soft like if I get a few pounds out here and there. But roughly, you can make a gift of 3000 pounds to somebody in a year, and it’s not considered as a taxable gift, but over that amount, it is. So when we see things like, we’re chatting to clients, and they’re going, Oh yeah, we’re setting up a mortgage. Wonderful, you know, obviously, where’s the deposit coming from? Are you doing yourself? Yeah, yeah, oh yeah. But my parents are giving me some money as well. People don’t realize that that money is potentially a gift. And, you know, so there’s a lot and lots of people doing things. So yes, we are talking people with huge amounts of money that are making phenomenal gifts to family to help, you know, do an effective financial plan when it comes to taxation if they do pass away. But we’re also talking about people who don’t have, you know, millions to their name. You know, this is people who are just doing things like many of us do to help out family members, and not realizing that they’re potentially putting themselves in that position. So gift tax is due up to seven years after a person dies. And another thing that’s quite interesting that I think people don’t necessarily realize, and it’s something that obviously, when I was first starting out as well, and I was looking at things like this, I was like, I didn’t realize that, but a gift is made by one person, so if somebody is you know, parents are helping out their child in terms of, like the taxation and things like that, and the thoughts as to what’s going to be happening is that it is one of them that makes it in the in the rules, in a sense, one of them will have made the gift. And it’s just really important to know who has made the gift, who that’s going to be attributed to, so that we know what plan we need to put into place. So gift is made up to seven years after. We have the IHT taxation there, and it does what’s known as taper over time. So the tax will remain the same. Amount will remain the same for the first three years, and then it reduces by a certain amount everywhere every year afterwards, until we reach the seven year mark. So it starts at 40% of the gift. So again, if I can do some very lovely, simple maths for myself, just to help me out, as a Monday morning, I only had one coffee 100,000 pounds gifted. Well, 40% so there’s 40,000 pounds potentially in tax that would be due if that person were to die in the first three years, and then between years three and seven, that amount reduces just as because that’s the rules basically at the moment, I have to say, so I’m talking about, we’re mid 2024 so these are the rules I’m saying at the moment. So we do have one insurer in the UK. I don’t usually name insurers, but seen as though there’s only one of them that do this, we’ve got LV, who offer a gift into vivos plan. So gifting to vivos is giv is seen as a specific plan to help with gift taxation. And you would choose the you don’t choose, obviously, the full amount of the gift. You would protect the 40% of the gift amount. And then that policy with LV does what it needs to do over the seven years. So you’d set it up for seven years at the 40% it’ll then taper over time. And there are some specific protections in place in terms of, if you do a gift into vivos plan, if there are kind of, you know, some kinds of change. Changes that the government might set in terms of amount of taxation and things like that. So it’s a really good thing if you can, to potentially do the full gifting Vivek plan, but there can be reasons that other options might be better, and so I will go through that as I do have a case study, but it’s always important, as with anything. And just bear in mind I also come from a compliance angle as well, is that if you have a gift into vivos plan that has those potential extras where it can change a little bit in terms of the taxations, if the government decides to do so, you need to offer that to the client. If you can potentially get that option, it might be that you choose to do a different routes in which I’ll go through in a second, and ultimately, you know, we’re going to be saying, right? This is, this is the option that does this, but there is also this one as an alternative. And I, in my case study, I brought the alternative just so you can see what one of those would look like. I’ll just go through something else as well. So the alternative to doing gift into vivos is something that some insurers are now saying they offer a gift planning solution, or they don’t even necessarily say that sometimes, but it’s something that advisors have been doing for many years. But basically, instead of doing gifting to vivos, you do five policies. And people might think that’s a bit of a faff. It can be, but ultimately, if there’s the best outcome for your clients, it’s the best outcome. And what you do is, is you set up the five policies to match the taper that happens over the seven years. So let’s go back to our example of the gift gifted 100,000 pounds. So we’re then going to be saying there’s a 40% tax. So 40,000 pound is liable for tax, but for some reason, we can’t do gifting to Vivek. Let’s say, or let’s say it’s like, massively more expensive than an alternative, and we’ll give the client both options. So what we would do we’ve got 40,000 pounds is the 40% so we’re going to split that into 20% values. So basically we’re going to be making five policies, so 40,000 divided by five 8000 pounds. So that 8000 pound is 20% of the 40% I hope that makes sense, because I know I’m sorry, playing about this bit here with numbers. So what we would do then is we would set up a policy for 8000 pounds every three years. We then set up on 8000 pounds over four years, same for five years, six years and seven years, so that it tapers over time to match what the taxation is as of the day that we’re setting it up as best as we are able to prepare for and and that can work really, really well at times. It might be, though, that especially if you’re doing something like that, let’s say was 8000 pounds, it might actually be that you’re hitting minimum premium with the insurers, and so you might actually need to to sort of do more than the summer shows, just because the minimum premium will just automatically make the summer short higher. But anyway, that’s just another thing. So basically, we’re not doing gifting to vive. Also, we’re doing five policies, and they’re each going to be of 20% value or percent value of the 40% of the gift tax, right? And you want this to be a single life, life insurance plan? You know, when we talk about IHT planning, we are usually, obviously, if it’s a couple, we’ll be doing joint life, second death, because IHT isn’t between married couples. It’d be different, obviously, if they were cohabiting. But IHT in general, which I think I’ve done previously in a podcast. You know, we’re going to be looking really at the joint life, second death with the gift it needs to be the first death. It’s a single policy, because it’s coming from one person and and we will be saying, obviously, that we need it paying out as soon as they pass away. We also need to make sure that we are putting this into trust. Massively important, the trusts on this. So this is the bit that I think is always a little bit intense and a little bit scary when it comes into like the gift planning and the IHT planning, because we need to do it right. So we need to make sure that it’s in trust. Because, if not, all we’re going to do is add the value to the estate, which is just going to cause any more issues. But especially as well with the gift planning, we need to make sure it’s going to the right person. So we need to make sure the beneficiary is right. And we also need to make sure that the terminal illness benefit that comes with life insurance is gifted. We need to make sure that it is gifted away. We can sometimes have issues with some insurance trusts where it doesn’t allow for the gift to be so sorry it doesn’t allow for the terminal illness cover to be gifted. That would be an issue if we were doing this for the for things like gift planning or IHT, so do make sure that if you are working in this area, in more like the IHT and gift planning side, that you double check your insurance trust before you even start going down the application route. Because the last thing you want to do is get there, get it all sorted, and then realize that something like. The terminal illness benefit has to be retained, which is just completely going to negate what you’re actually doing.

Kathryn Knowles  10:06

So a bit of an example of that. I did some gift planning for somebody. It was quite a while ago now, when we actually had two insurers who could do the gift into vivos. And I was doing it in such a way that because of the way that the person felt, they didn’t want to do medicals, things like that. They had what’s known as white coat syndrome, where they wouldn’t feel very well at all if they were near a medical professional. So it set the policy in certain ways to make it work for them, and also being cost effective, and I say with the medicals and everything. So it ended up, it’s going to sound really strange, but anyway, we went to three insurers for the insurance, and with each insurer, I had to use a different trust. With one insurer, I had to use an absolute trust. And I do tend to try and avoid absolute trust, because once they basically, there’s just no flexibility. You know, once that is put in place. There’s no way to change who is benefiting from the policy, which in some ways you would hope would be the case. You know that nothing’s happened to that person. There’s been no fallings out or anything like that. But you know, it is always nice. And generally, we would want to be using some more like a flexible or discretionary trust, where we can alter and tweak if we need to. But yes, we had to use an absolute trust, a flexible and a fixed trust. And the reason that we had to do that is that with one of the trusts, I wanted to do flexible with all discretionary and with one of the insurers, when I was looking at their flexible or discretionary version, it was the spouse that would automatically receive the funds. And the wording of it was just so borderline that I just didn’t feel comfortable using it, because I was just, oh, hang on a minute. There could be argument here that this should be going to the partner, not to, you know, to the to the to the married partner, rather than going to, usually, children who get the gifts, you know, instead of going to the children. So I just chose a different trust, because I just did not feel comfortable that there wouldn’t be a question at some point about, well, why hasn’t the partner received this money? Because yes, the plan would be very clear as to what was intended. But sometimes we do have it where places like HMRC can have a look at these things, depending upon the amount of money that’s going out and what’s going on, and basically, go, hang on a minute. Well, why didn’t this pay to the spouse? And if it had gone to the spouse, then your estate would have been this, and we’d have been due this, you know, kind of thing. There was another one of the insurers where the it said that it had to, there was no option to gift the terminal illness benefit, which also was completely not what we needed to do either. So I had to use a different I couldn’t use their flexible. So there’s only one of them where I could use the flexible, discretionary trust. The other two insurers, I had to go completely different to what I would usually do. And it is so, so important I say in terms of that term, illness benefit now, and I’ve mentioned in a previous episode. Maybe people might not have listened to it, but you know, we have had instances where HMRC have had a look at things like terminal illness benefits, when they’re well, what somebody’s terminal illness, when there has been a claim on these policies, and go, Well, hang on a minute. How come? How come you didn’t claim on terminal illness benefits? And actually we think you should have done. And because of that, your estate would have been this. So you owe us this. So, you know, even though the insurance has been done in a set way, even though, even potentially, the trust has been set up but not set to automatically gift the terminal illness, we can have it where you the claim might end up not doing what we’re wanting it to do. Because, you know, by the rules of the trust and things like that, the HMRC will have a look and go, Well, this is what the trust is saying, or this is what the trust isn’t saying, and things like that, which we just need to be careful of and just bear in mind as well, is that we all, I think many of us, know in the advice world that terminals is actually very, very difficult to claim On reason being. Amy says, as an example. It’s very hard with terminal illness. It is usually to do with cancer. It can be other things, obviously, but it is often to do with cancer. And the thing is, is that it’s that, it’s that wording of with less than 12 months left to live, and a difficulty you have is to say, like, if we’ve got an oncologist who is the cancer specialist and the insurers need to work off absolutes. It’s very, you know, they can’t really work off gray, which, you know, is tricky sometimes, because I think especially as advisors and as policy holders, you know, you can see things, and you think, come on a minute, we’re, you know, we are a little bit gray, but, you know, we’re really, really, really close. But it can end up being a little bit of a a tricky claim situation, because it’s very unusual for an oncologist to say this person has less than 12 months left to live. It’s usually, I believe, I think it’s likely, that’s the wording that would usually be seen, which doesn’t mean, yes, it’s the. Less than 12 months that there are, of course, situations where people are phenomenally terminally ill, where they will be the insurer, you know, the oncologist will say, absolutely yes, this person is going but most of the time it is a I believe I will if there’s some kind of new drug that’s being tested with the person, then that will also pause the claim as well. So even though, so I’m trying to say is that it, it can be very, very hard to claim on a terminal illness and to get that through as a claim. But HMRC won’t see that necessarily. They won’t be looking at, well, what does this mean? Would this have definitely happened? Because it’s, it’s not necessarily, I think, in their remit to sort of look at that, if they feel, then they believe that the terminal illness was sufficient, regardless of what the insurer says as to whether or not they were going to allow it to claim or not, they can say, well, actually, no, this should have been in the estate and paid out. And, you know, potentially even suggest that there’s been a deliberate, not non claim, in the sense, on the terminal illness benefit to avoid the tax, which is, is where we get the trickiness. So, but if we’ve deliberately choosing to give the terminal illness, then that’s obviously, it’s a contract. It’s all set up. It’s what the trust is there to do. And as an advisor, it is our responsibility to sort that and to make sure that is right. And obviously, from a compliance from a complaint point of view, we could have quite an issue. And for the majority of people who are making gifting, we’re not talking small sums of money, so that’s not small sums of taxation. So we do really need to be mindful of the position we’re putting our own selves in if we don’t look at those trusts and get them right. So I’ve got a case study for you, and it was somebody that I was helping in their late 70s, and the gift tax that we were looking at was 1.2 million, okay, and so what we were doing is we needed to do five times 240,000 pounds worth of cover. And so that is the 1.2 million tax divided by five, and that gave us a 240 over. And we were going to do the five policies over seven years, six years, five years, four years and three years. So we set that up, doing it that way, and that came to a premium of about 1600 pounds per month for the insurance over the next seven years. Now that would start to decrease after year three, because obviously one of these policies would stop at the end of year three, another one would stop at the end of year four, at the end of year five, and so the premium would be decreasing over time. Now, with this person, what I did is I did give them the gift into vivos option as well that we could potentially look at so they could make a decision. It was all done through a financial advisor as well. Who was the person, obviously letting me know exactly right? This is calculated as the the insurance that we need. This is this that we need things like that and and yes, so obviously we were getting all of that sorted. And the gift into vivos was roughly 150 pound a month more to do that. So from a compliance point of view, from everybody’s point of view. And as the advisor I’ve said, this is the gift into vivos policy, which is specifically designed to do this. And, you know, we can potentially consider this, or we can look at this one where we do it over five policies. You know, this is what it doesn’t have, compared to the gifting to be Evos policy. This is the price. It’s going to save this much per month. And ultimately, they decided to go with those five policies because they felt that actually, that worked really well for them and what they had planned. So as always, just make sure you’re giving, you know, if need be multiple options to the client, making sure, as an advisor, that you know, obviously you’re protecting your own back in terms of what you recommend then recommending, so nobody can say you didn’t go for both options and tell them exactly what was needed and and hopefully that has been helpful and explained how we would do that. Um, so thank you for listening, everybody. Next time Matt Ryan is back with me, does feel like a little while since he’s been with me, but we’re going to be talking we’re going to be talking about thyroid disorders, and we are taking a break over the summer, so the thyroid disorder episode will be with you at the beginning of September. As always do visit the website practicalhything protection.co.uk, if you want to listen to any other podcast episodes and access your CPD certificate that we have thanks to our sponsors, the Okta members. I hope you all have a lovely summer, everybody, and we’ll be back soon. Bye.