Death and Taxes: Protect Your Family. Protect Your Investments.
Death and taxes, the two inevitabilities. So what do landlords need to know about them?
Overwhelmingly the press love to paint landlords as being the property bad guys, but actually, if the queries that we hear across the board are anything to go by, the reality couldn’t be further from the truth.
As well as countless questions about how to make sure you are doing the right thing by tenants and keeping on the right side of the numerous letting laws, we get a lot of enquiries about how to best protect your portfolio for the next generation – it seems that landlords are spending a big chunk of time considering those around them, now and in the future.
We thought it was time to tackle these questions head on, and explore how you can best protect your assets, and in turn your family, when the worst happens.
In this episode:
- We caught up with Monica Bradley, company director of MB Associates, who gave us the lowdown on life insurance, and why it’s so important for landlords
- She explains the reason a simple change now, could mean a huge amount to your dependents in the future
- We talk estate planning with planning professional Rob Foyle, who outlines why a bit of prior planning can safeguard against a whole heap of issues
- Finally, we chatted to Mashroom’s very own Kirsty Primmer, one of our mortgage and protection advisors, to understand a little more about exactly how to find the right life insurance product, and why following a Facebook ad might not give you quite the cover you need…
Life, death and insurance
OK. Insurance, tax and death. Not exactly the cheeriest trio of topics, we grant you. But, important. Honestly, this is key for you now, and your beneficiaries at a (hopefully) much later date.
But how can life insurance help you? Surely if it were so vital, it would be a mandatory part of landlord property ownership? Monica Bradley explains:
QUOTE: Many years ago when you took out a mortgage, and it didn’t matter whether it was a commercial mortgage or for a residential property, you had to take out life insurance. It was a condition that the banks insisted upon and they put that condition in the mortgage offer.
Monica continued: ‘Upon the death of a client, the payment would go direct to the bank, so they knew they were going to get their money, but that’s slackened off. Now the emphasis is very much on the individual or the company to make sure that they protect the loan, but because it’s not 100% compulsory, I think people don’t always think about it, and they tend to miss it.’
Is it possible that people don’t consider it because it isn’t something that will affect them? It would only be an issue after they’d gone, after all…
‘True,’ agreed Monica. ‘I’ve seen this several times. If we get a claim, the first thing we do is check to see what policies are in place, because it is a real problem for dependents. If there’s no cover in place, the bank mortgage goes on, and that doesn’t stop any interest accruing.’
QUOTE: The bank may say “We’re really sorry that you’ve lost your father, your mother, your sister, your brother”, but they don’t stop charging you interest. It’s a real problem if you haven’t taken out protection.
Passing the buck
We have heard some slightly dubious suggestions of trying to double-cross the tax man by sneakily changing the ownership of properties over, and transferring the mortgage to a dependent before anything happens. But it’s definitely not that simple?
QUOTE This is a massive misconception in the market. If something happens to a loved one, it’s a very, very difficult time in the first place. But people think that they’re actually next in line to the property. They automatically think that’s going to be passed on to them and the bank will just transfer the mortgage. No, no, no, no. It’s a very big no, it doesn’t work like that.’
Monica continued: ‘This is something that landlords must really consider because they’re often building wealth for their families. They’re building wealth for their loved ones. They’re building an income, but it doesn’t automatically transfer if something happens to one of them. That mortgage – if there’s a mortgage on a property – the bank has got to agree to transfer, and that is a whole new application. It isn’t just a case of them saying, give us your name, we’ll transfer it to you. The client has to meet the terms and conditions of the bank. There are loads of things to take into consideration.’
‘If you transfer the name over, you die and then your children take that loan on and they can’t actually meet those terms, frankly the bank will be looking for their money back. If they don’t meet the terms and conditions, then they will be asked to sell the property.’
OK, so as well as dealing with the grief of losing a loved one and all of the associated admin, your beneficiary will have to go through a stringent mortgage application process for any property with a mortgage on it that you have gifted them?
‘At least if you’ve taken out an insurance policy, the beneficiaries have a choice to pay back that debt and the asset can then be transferred to them easily at the land registry because there’s no mortgage to take into consideration, there’s nothing for a bank to say “we can’t do it” because the bank don’t have any charge over it.’
This all seems remarkably simple to fix, and terribly complex to ignore… is there any further complexity to the process that you need to consider?
‘Fundamentally, what I say to landlords is “actually what is it you’re trying to achieve?” Are you trying to achieve an income for yourself or later on? Are you trying to achieve some equity to provide for your children, your dependents, your wife, your partner? What are you actually trying to achieve?’ explained Monica.
‘When you know what you’re trying to achieve, if you’ve got borrowing on your properties, then I would say look at taking out life insurance to cover those debts, so that they can actually be passed on. And the dependents and your beneficiaries really have a choice as to what they then do with them. They can make their own decision to sell them if they want to, or they can keep them and have an income from them themselves.’
It is a depressing fact of life that things that deliver good value usually cost. If not upfront, then eventually, in the form of tax! What’s the deal with life insurance?
‘If you’re a landlord and you own the properties under a limited company, the good thing is that there is something that you can do which is highly tax efficient. You can actually put your life insurance through your company and it is fully tax deductible,’ laughed Monica.
‘It isn’t a benefit in kind, it simply will reduce, so whatever premium you pay out of your limited company for that insurance to protect you in the event of death, it is fully tax deductible.’
Does having a policy in place do anything to help safeguard against a whopping inheritance tax bill?
‘This is where really anybody looking at inheritance tax planning needs to really talk to an advisor,’ warned Monica. ‘However, the answer to your question is yes. These things are always changeable, as we know via budgets and so on, but we can protect it and put that in trust so at least if your beneficiaries have got to pay a chunky old tax bill to the revenue you can cover it with life insurance.’
Trust in the process
Putting things in trust is a phrase we hear a lot, but putting an insurance policy in trust? That’s a new one…
‘Whenever you’re taking life assurance out, you should always put your policies in trust because what you’re doing then is you’re keeping the proceeds that get paid out in your bloodline. It stays within your family, where you wanted it to go in the first place – but more importantly, it gets paid out quickly.’ explained Monica.
‘If anybody has had to complete probate and look after somebody’s estate once they’ve died, they’ll understand that it is complicated. You have to complete endless forms and let me tell you I’ve seen some probates waiting three years before it’s done. Now, if you’ve had to wait three years to get a life insurance policy paid out, that would be painful.’
‘So, it’s really important that the policy is in trust and can therefore pay out straight away. It protects the money, keeps it in your bloodline and it’s payable outside the estate. It doesn’t cost to put an insurance policy in trust, so there’s no reason not to.’
Where there’s a way, there should be a will
Trusts with regards to insurance may be a relatively new thing to consider, most of us are more familiar with the term when it comes to planning elements like our wills.
It is fair to say that life insurance and estate planning really do go hand-in-hand. Expert estate planner Rob Foyle gave some of his time to explain a little more about why this legal document is one you really should leave to chance.
‘Believe or not 60% of the population don’t have a will,’ said Rob. ‘I think in the first instance, it’s really important that everyone should have a will. We all have some form of estate, whether it be bricks and mortar property, or cash in the bank.’
‘With a will, you can nominate beneficiaries. If you have children under the age of 18 you can nominate guardians, and also decide what your funeral wishes are, whether you want to be buried or cremated, so it’s really important that you have the will to ensure firstly that you nominate the correct people to execute your wishes, but also that the correct people inherit.’
The 60% of people that don’t have a will in place… What will happen to their estates upon their death?
‘The laws of intestacy would cut in, in the first instance. You might have an executor administering your estate in the first instance, albeit possibly not the person you wished for. And beneficiaries may not necessarily be individuals that you want them to be, and you certainly wouldn’t want the money going to the taxman’.
So, things don’t just automatically pass to your children or spouse if there’s nothing in place?
‘You’d have to look at the person’s circumstance and personal circumstances. Are they single, are they married? If they’re married, typically you’d want to leave everything to your spouse. With a will, you can ensure that happens. The laws of intestacy, it’ll nominate your spouse in the first instance, but also a share goes through to your children,’’ explained Rob.
QUOTE: You may also want to exclude a person from benefiting and instead of your estate passing through to your partner, you may want to pass it through to your business partner. Again, a will is a good way of structuring the outcomes that you require.
Do landlords have to be more specific, if they have a ‘personal estate’, and a property portfolio?
‘Most definitely,’ stressed Rob. ‘If landlords do have multiple properties – most landlords would have their main residence plus additional properties – it’s really key that they have a will, to ensure that those properties pass through to the correct family members, or even business partners. Its vital that they have a will to make sure that the assets pass through to those that are nominated.’
How simple is the process?
We’ve all seen the will-writing kits on the shelf at high street newsagents… can it really be that simple? (It should be noted that Rob goes quiet here, which we take as a telling sign!)
‘Well, you can get one off the shelf…’ he admits. ‘I have read the off-the-shelf documents, and I will say that if you want the job done properly, you really do need to speak to a professional.’
QUOTE This is probably the most important document that you’ll ever write during your life, so you need to make sure that it’s correct.
Easing the cost
If you are passing any amount of estate to beneficiaries, the subject of inheritance tax is likely to raise its ugly head. We’ve touched on how having a life insurance policy in place can help ease the financial burden on your loved ones, but does having a will in place provide any help to your dearest and dearest when negotiating this process?
’Inheritance tax is the tax payable upon death. We may all have some potential form of inheritance tax to pay in the future,’ said Rob.
‘If you are a single person, with no children, with property your threshold would be £325,000. A single person, with property with a child their allowance would be £500,000. If you’ve got a couple, with property, and children their allowance would be £1 million.’
‘There’s not a lot of room for tax efficiency. If you’re a landlord and you’ve got multiple properties, worth £3-400,000 pounds each, suddenly you’re over that £1 million threshold. And then it’s 40% tax on everything, and that’s payable to the taxman in advance of probate being sorted out. One has to raise those funds, before the estate is distributed among the beneficiaries.’
Wow, that’s a harsh ‘gift’ from HMRC for your grieving family members. Does having a will help you manage that frankly tricky issue?
‘It certainly does,’ assured Rob. ‘And it does quicken up the process as well. You appoint people that you want to have control of your estate. You may even decide you want a professional executor in charge of your estate. As long as it’s clearly documented and constructed through the wills as to what your wishes and outcomes are, and the appropriate people to manage your affairs, and you’ve done the correct planning, that’s the most important thing.’
‘Properties, your assets – you can have an estate which is more tax efficient if you do some clever things. That’s where we come into our own providing guidance, perhaps things like holding the property as tenants in common instead of holding the property jointly, for example.
If the properties are owned within a business, who are the shareholders of the business? Who are the key stakeholders? Through the will and including the right clauses you can take advantage of the thresholds. But unfortunately it’s a tax we have to pay – if we can reduce it, fantastic. There are life insurance policies to pay off the tax liability – 40% over £1 million is a substantial amount to consider.’
Power of Attorney
Wills are one thing – and I think most of us are probably convinced that if we don’t have one in place, we probably should get that sorted (and not via a newsagent off the shelf option)!
But what about Lasting Power of Attorney (LPA)? They seem to go hand-in-hand, but are the two linked, and should you consider LPA when arranging a will?
‘With regards to Power of Attorney, I like to look at a person’s whole estate as three pieces of a jigsaw. First of all, you’ve got wills. With wills, you’ve got trust work with gives you the option to be a little more tax efficient. And then the third piece of the jigsaw is the Lasting Power of Attorney,’ explained Rob.
‘You can’t write a will if you don’t have capacity, and you can’t have LPAs if you don’t have capacity. So in the event of one losing capacity for whatever reason – whether it be a stroke, dementia, an accident, old age – you want to make sure that you’ve appointed an attorney to manage your affairs. If you manage a portfolio and you’re managing properties, who’s going to take over managing those properties if you no longer can. You can’t even sell a property if you don’t have capacity to sign the documents.’
Ok, so this really is one that everyone should have in place sooner rather than later?
QUOTE You need to be doing it at the same time as your will. Get it right the first time, and it’s done. Obviously, review your circumstances as and when there is a change, and possibly every two years pull them out and have a look.
So, in a nutshell, this really is a case of prior planning prevents disaster further down the line? What is Rob’s top tip?
QUOTE: You can go into WH Smiths and buy a will kit, but you really need to make sure that you are able to include the details that give you the outcomes that you want. That’s down to professional expertise.
All this talk of planning for the future, for things that really, none of us particularly want to think about, can feel a little overwhelming.
It’s understandable that many people bury their head in the sand and try to ignore estate planning, whether it be wills or life insurance.
We caught up with Kirsty Primmer, one of Mashroom’s mortgage and protection advisors, to understand a little more about how simple it really is to get this stuff sorted… no need to push it to the back of your mind! So Kirsty, honestly, how much of a headache is sorting out our life insurance really going to be?
‘It’s really not complicated,’ laughs Kirsty. ‘However, you can get caught in a trap where you don’t necessarily know what route you’re taking, so it’s always best to speak to an advisor. We have a number of leading insurers on our panel and they offer lots of different quirks to suit different people’s needs.’
‘One insurance might be really good at covering a certain condition, while others might not be. They’ll be able to recommend the best thing for you, run through a medical questionnaire, ask for some information and the insurer might need to get a GP’s report for a bit more information.
So, not quite as simple as a Facebook ad offering you a policy for £3 a month, as long as you’re under 55 and a non-smoker?
‘It’s not quite as simple as you put things in a computer and something comes out,’ agrees Kirsty. ‘There’s a lot more to it and that’s why me and the team are here to help, because it’s quite personal. There will be times where I have to ask personal questions, however, it is something I do very regularly so please don’t worry!’
Have you ever dealt with anyone that’s uncoverable?
‘There’s a lot that I’ve seen, but there’s been some really great things that I’ve managed to cover, people who never thought that they would get insurance, and see the peace of mind is really lovely,’ said Kirsty.
Part of life’s journey
‘There’s probably no point where you don’t need insurance in life’, mused Kirsty.
‘Although it’s not a condition of a mortgage anymore to have life insurance. I would say it’s absolutely essential as a minimum to have life insurance when you have a property, especially if you’ve got family, partners, people that you want to leave that legacy to.’
‘A lot of people become landlords because they want to leave a legacy to somebody. Why would you want to leave that with a big debt? Life insurance gives you the reassurance that you can leave your family in a really great position when the worst happens.’
Keeping up to date
We all know how important it is to keep your landlord insurance up to date with regards to any changes to your property… what about life insurance though? If you have any major changes to your personal circumstances, when do you need to alert your insurer?
‘Once you’ve got the policies, it’s normally set rate for a certain period of time. It’s called a guaranteed premium’, explained Kirsty. ‘That’s generally what’s offered on life insurance terms. However, I would always review it every time I review a mortgage. I review my own life insurance every two to five years.’
QUOTE: ‘Whenever I’m really looking at the fixed rates, I tend to go for a fixed rate as I’m pretty risk averse! So I would always review then, just to see if there’s anything cheaper out there if the conditions have changed. Some older life insurance policies are better to keep because they cover more conditions, or they cover more generalised things.’
That’s all for this episode of the Mashroom Show, but the next is airing on Friday the 30th June, and we’ll be joined by Paul Shamplina, who’s going to be looking the upcoming loss of Section 21.
In the meantime, why not head on over to Facebook and join the Mashroom Landlord Community Facebook page. There are over 7,000 landlords regularly chatting, sharing queries and questions and engaging with industry experts, so it’s a great place to have a chat about what’s on your mind, and get some great advice.