Toby Johncox, head of mortgage sales for Enness Global, the world’s leading broker of high net worth mortgages and bridging finance, talked to Carlton Crabbe, CEO of Capital for Life, a life insurance and premium financing firm for HNW clients, to discuss a recent case study that puts into context how life insurance can be used to protect beneficiaries of family wealth.
Let’s consider the case study of a couple, a family, and their estate planning in a wider context, or more holistic context. The husband and wife are French nationals. He’s 50, and she is 48. And they’ve got a young family. They’ve got a London property already, valued at 7 million pounds, and they’ve got no existing mortgage on it. So that is a nice asset to be holding. They are non-domiciled, but they’re currently resident in their house in London in the UK. So one of the things that they want to do is to protect the family against inheritance tax.
The simple solution
This is a fairly straightforward solution. The UK inheritance tax liability on the property if they pass away today is 2.4 million pounds. Also note that the husband is the main breadwinner. So the two things they want to do is cover the current UK inheritance tax position, but also consider what happens if they continue to hold that property over the next 10, 20 or 30 years even? There’s going to probably be a rising UK inheritance tax bill, if London property continues to rise in value, which over the long term, I think most people would expect it to do.
So what we’re looking at here is a simple solution. If the couple just remortgage their property, on a low 15% Loan-To-Value (LTV) and take out 1.1 million pounds of equity from that property, they can use that 1.1 million to buy an insurance policy. And that will then give them more than enough cover for what they’re looking to achieve here. Because if the husband passes away, the policy his estate will receive 3.9 million pounds under this example policy. That’s the inheritance tax of 2.4 million pounds covered plus the return of the premium in itself. It’s important to note that if the property is held in joint names, it would pass to the wife and, therefore inheritance tax wouldn’t be payable upon the first death. But the 3.9 million pounds can be used to either pay the inheritance tax liability if both the husband and wife were to pass away, or if the husband just passes away, then it all passes to the wife to take care of the family. She can put some of that aside for maybe a future inheritance tax liability, or indeed take out her own policy.
The more interesting solution
But there is a more interesting solution. In this case study the husband is aged 50 and now he’s insured for 3.9 million pounds. But, over time, the value of the property in London rises. So if we look at this insurance policy at the age of 90, it will pay out 7 million pounds. That’s taking into account some future rises in property values, because it’s all very well dealing with the inheritance tax position today, but what about the future because we’ll assume this family have no intention of leaving London. Over the longer term you would expect that inheritance tax bill to rise because of the expected rise of values in London property. That is a straightforward assumption and a straightforward case.
You can set up the policies in a number of different ways when it comes to annual increases or being linked to a particular index. But we have just assumed a gentle rise of two and a half or 3% annually. But you can set up these policies, within reason, how you want them to work.
The more exciting solution
Let’s dig a little bit deeper into what all of this family’s goals are and what they’re looking to achieve. The husband has a current income of 450,000 pounds a year from his job and he’s got a private bank portfolio of 4 million pounds and his major concern or expenditure is on school fees. Unsurprisingly, he’s also saving any excess income for retirement, because he’s 50 and he wants to retire at 60. And of course, he wants to cover the UK inheritance tax as already mentioned, which is 2.4 million pounds on the property as of today. Now we need to take into consideration the private bank portfolio which has a 1.6 million pound inheritance tax liability.
We’re no longer just covering his inheritance tax position on his property with an insurance policy, but we’ve now got a private banking portfolio to take into consideration as well. This is where it gets slightly more exciting. He also wants to take an income of 250,000 pounds a year in retirement, which is 10 years away in our case study. He’s not sure that the private banking portfolio currently will afford him that level of income. That’s a return of just over 6% per annum, which it could do, but he would like to look at other options here as well. And, of course, the husband and wife are French so they would like to buy a property in Paris, maybe an apartment, and look at using that as a buy-to-let and maybe also using that as a way of topping up their income in addition to having a foothold back in their home country. That’s the extra detail we know about this family. We’ve got a portfolio of 4 million pounds, plenty of excess income, which can be used to pay the new mortgage interest, because at the moment he hasn’t got a mortgage. We would recommend he takes out a mortgage because there are plenty of mortgage options for individuals with complex income such as in this case study. That way he can take advantage of the cheap finance he believes is going to remain in vogue for a while.
He also wants to consider the future rises in the property value and the private banking portfolio and likes the idea of diversification of his portfolio as well. He would also like, if it’s possible, to pay for his grandchildren’s education, and take care of some estate planning opportunities at the same time.
The actual solution
What actually happened in this case study is that the individual took out a 4.8 million pound mortgage against his 7 million pound property, which is 70% LTV. We’re going to put that into an offshore life insurance policy with increasing death benefit. The insurance policy payout is now 12.2 million pounds and, if he passes away, that will be more than enough for his family to live on. You can see the logic of the planning that we’re doing here. Most people associate life insurance with just cover for a tax bill but when you’ve got a cash value whole-of-life policy, you can also start to take an income from the policy. So on the modelling that we’ve done, he can take an income of 250,000 pounds a year from the insurance policy from the age of 60. So that’s his retirement income in 10 years’ time and he can still keep the 12.2 million pounds death benefit. That is a big change from what most of us in the UK are used to. The natural instinct, when you talk about life insurance is that it’s just a monthly payment that you make and it pays off your mortgage when you pass away. Thinking of it as an asset is a completely different way of thinking.
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