Everything You Need to Know About Protecting Your Portfolio
Is Life Insurance top of your landlord’s must-have list? No? Well, it really should be.
We caught up with Monica Bradley, company director of MB Associates, to chat about why landlords who don’t insure themselves are playing a risky game. Not one that will backfire on them, admittedly, but one that really could leave their loved ones up the creek without any sign of a paddle.
Life, death and insurance
Insurance is a given for landlords. Many of us will be sensibly insured for all the uncertainties that life can throw at us, but how many of you are insured for the one certainty… death?
Yes, yes, it’s a morbid topic of conversation. But it’s an important one. As a landlord, you would leave behind a valuable asset, and it’s likely you would like to see that asset go to your nearest and dearest when you depart. Certainly, it’s unlikely that you would like to see it disappear into HMRC’s coffers!
But how can life insurance help guarantee this? It’s clear how a will is linked to your estate in life, but life insurance – how does that connect?
‘It’s really linked, explained Monica. ‘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.’
Upon the death of a client, the payment would go directly 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.
Monica continued: ‘When you take out your loan of hundreds of thousands of pounds, it’s crazy that you don’t think about what would happen if you were sick or if you die. You cover your mobile phone, or you’re very happy to cover your pet insurance, 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. Particularly 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.
‘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
Nobody wants to leave their family high and dry with a mortgage racking up around their ears! 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, and HMRC be so befuddled there’ll be no tax to pay.
We’re going to hazard a guess that it’s not that simple?
‘This is a massive misconception in the market,’ said Monica. ‘If something happens to one of their loved ones, it’s a very, very difficult time in the first place. But they 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.’
‘This is something that landlords have to really, 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 happen 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, quite frankly, the bank will be looking for their money back because obviously 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? That’s a pretty stressful process. And of course all the time the payments will have to be being made as well, presumably? That really piles on the pressure!
‘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.’
It seems that an awful lot of heartache and stress can be solved by taking out a simple life insurance policy. In fact, it all seems remarkably simple if you do, and terribly complex if you don’t… is there any further complexity to the process that you need to consider? Tying wills into the policy, and the like?
‘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! Is life insurance going to be another one of those have-to-haves that leaves us gnashing our teeth at the bottom line figure?
‘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.
Blimey, this gets better and better! Go on…!
‘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.’
‘It’s very cost effective. It’s tax efficient, and it’s allowable. It’s a revenue allowable business expense, so you can protect yourself through your limited company.’
Does having a policy in place do anything to help safeguard against a whopping inheritance tax bill? Beneficiaries can end up paying 40%, which really feels like a kick in the teeth after all the taxes landlords cop across the board…
‘This is where really anybody looking at inheritance tax planning needs to really talk to an advisor, because with regards to landlords owning their properties under a limited company, the inheritance tax and capital gains tax is very different to if you own it on your own,’ warned Monica.
‘However, the answer to your question is yes. You can take out life insurance when the calculation is done so you can have the calculation as to where you actually stand. You can only look at where you are right now, but everything should always be updated.’
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.
So the life insurance wouldn’t mitigate an inheritance tax bill per se, but it would certainly make it less of a costly issue for your beneficiaries?
‘Yes. As I said at the very beginning, really do seek some specialist help on this but yes, it is doable’.
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… What’s that all about?
‘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.’
And you can do this with any legal set up, self-employed, limited company etc?
‘It doesn’t matter whether it’s through a limited company or not, you must put your policies in trust,’ stressed Monica.
Ok, in trusts we trust!
Anything we’re missing?
Ok, so life insurance makes sense. For peace of mind and the benefit of those that you hold dear, it is a logical step.
While we’re at it, are there any other insurances that deliver the same punch, that pass people by?
‘For example, you say “Ok, well I’ve got £500,000 of loans in my limited company, I want to protect them. I’ll put that limited company life insurance through my company…” but you still can have other insurances personally,” explained Monica.
‘You could have sick pay, your critical illness pay as individual cover, for example. You’re not limited to having a certain amount. The only thing you are limited on is sick pay because you can’t have 150% of your income in sick pay, otherwise, no one would go to work! You can have your sick pay – incidentally if anybody is wondering, everybody should check if you get paid sick pay from your employer because if you don’t, statutory is about £109 a week. That is payable for 28 weeks, and you absolutely can have it above the limited company.’
Is that also tax deductible?
‘No, because you’re paying out of your own salary. You’ve already paid tax on your salary.’