Estate Planning Guide

107 106 PRACTICALITIES AND TIPS PRACTICALITIES AND TIPS Lifetime Mortgage Equity Release Plans This area is one that has received significant attention recently in the Council of Mortgage Lenders Later-Life borrowing – New mindsets: Old silos report, the FCA’s Mortgages market study and its Occasional Paper, Ageing Population and Financial Services. It is noted that the changing demographics of the UK have led to initiatives to open up later-life lending to older consumers, leading to many retail lenders increasing their maximum lending age, with the average maximum age limit amongst the largest lenders up to 81. Nevertheless, lenders and trade bodies have been unclear about permissible conduct, the FCA states, “Our MCOB rules do not aim to discourage firms from lending to older borrowers, as long as they are credit-worthy… 5.2 Our guidance makes clear that pension and investment income may be considered as potential income sources for the purposes of the affordability test.” The FCA also clarifies that regulation does not prevent lenders from offering older borrowers an interest-only mortgage using the underlying housing equity to evidence a credible repayment strategy. Consequently, the FCA’s view is that. “Although lifetime mortgages remain a useful tool and meet a number of consumer needs, there is a risk that some customers are resorting to taking a lifetime mortgage when some form of standard interest-only mortgage may better match their needs and circumstances”. NUMBER AND VALUE OF EQUITY SALES PER YEAR SOURCE: EQUITY RELEASE COUNCIL SALES DATA 35,000 2,500 2,500 1,500 1,000 500 0 Number of sales per annum Value sales per annum (£) 30,000 25,000 20,000 15,000 10,000 5,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 LUMP-SUM LIFETIME MORTGAGE DRAWDOWN LIFETIME MORTGAGE HOME REVERSION VALUE OF SALES Trust based arrangements The dangers of Asset Protection Trusts These are trusts that are primarily designed to exclude assets from the calculation used by local authorities for assessing the level of an individual’s care planning fees. Assets can, of course, be protected from IHT and removed from the ownership/estate of an individual, but there have been misleading claims made by those marketing the schemes including that “the settlor can change their mind at any time” and ”retain full control of what goes in and what comes out of the trust, no questions asked”. The reality is that, if a local authority discovers the transfer has taken place simply avoid paying care fees, this will be classed as a ‘deprivation of assets. This could certainly be the case if assets have been transferred (whether to a trust or outright) with the intent of avoiding using them to pay for care within six months of entering a home, or while a person is in a home. The authority then has a wide range of powers, including treating the settlor as if they still owned the property (called ‘notional capital’) and bill them accordingly. The authority can even put a charge over a house if looking to recover money owed to them in respect of the original owner’s place in a home. It is not sufficient that there was no immediate need for care and no foreseeable need in the future at the time of the transfer into trust particularly if the settlor continues to live in the property after transferring it to the trust. Authorities will ask if those seeking care funding have ever owned a property and if so, if it has been given away they want to know 5.3 why. The intention is very important, although the timing is also a factor – if, when the person made the gift, they could they have reasonably known that they might need care, it runs a high risk of being deemed as deliberate deprivation. Life Insurance Section 2.4 of this Guide discusses the benefits of writing insurance policies into trust, not just because it is then outside the deceased’s estate for tax purposes, but also for the quicker access to the cash that is available because it won’t have to go through probate. The value of payments made by the insured party during their lifetime will also reduce the value of their estate for IHT purposes, although it’s important to remember that premiums paid into the policy once it is written into trust will be treated as PETs or CLTs unless they are otherwise exempt. It is a good idea to choose a policy with guaranteed premiums. This may be more expensive than selecting variable premiums, but avoids any scenario where the insurer raises the premiums to an unaffordable level, at which the insured party loses all of the benefits. Additionally, since spouses and civil partners can pass unused IHT allowances between each other, it makes sense for couples to buy a joint whole of life policy arranged to pay out only on the second death. 5.4