This June marked 180 years since Queen Victoria came to the throne and incredibly the last Victorian, Ethel Lang, passed away only in 2015. Whilst in many ways the Victorian era seems alien to modern Britain, images of horse drawn carriages and chimney sweeps springing to mind, it is surprising how much of ‘Victoriana’ still shapes our social constructs today. I am not referring to Britain’s national obsession since these times with the Christmas tree, or huge white weddings, but to the way in which, we, as a population, deal with matters of death and dying.
The Victorian age saw the explosion of life insurance policies, thanks largely to a growing middle class and overall better life expectancy. That being said, the average life expectancy was still nowhere near your expected three score and ten, with the Office of National Statistics confirming that most of us can now expect to reach 80, as this remained around 40 years of age for our ancestors. Therefore, planning on how best to provide for oneself in old age was not a primary consideration. The reason behind this explosion of interest lay within the population at large wishing to provide for their families, if a terrible accident were to befall them.
Whilst the upper classes took out life insurance, the lower classes joined so-called ‘Death Clubs’, run by Friendly Societies, with the idea being that tradesmen paid in a weekly amount, in return for financial support to contribute to a fund that paid out on death to cover funeral costs.
However, life insurance was something of a double-edged sword as whilst piece of mind may have been provided, these policies could also provide a path to easy wealth…
The average cost of a funeral was one to two pounds, and with some ‘clubs’ paying out four on death, a profit was to be had… Some poor children were enrolled in multiple clubs, and so much was the scale of the problem that in 1850 Parliament enacted a statue prohibiting the insuring of children under 10 for more than three pounds!
In a similar vein, Mary Ann Cotton is arguably a candidate for the title of the most prolific serial killer of the era. A woman of ‘comely’ appearance, she used arsenic to murder her mother, three husbands, fifteen children and step-children, … and a lodger!
Thankfully, we have progressed somewhat since the times of Mary Ann and the infamous Dr Crippen, with their tales of arsenic, strychnine, and rat bait, but have our attitudes to preparing for our old age really altered a great deal?
Recent articles would argue that we are still more inclined to consider life insurance policies before setting aside funding for our pensions, despite the fact that our life expectancy is now twice that of our Victorian ancestors. But why? There doesn’t appear to be a ready answer to this question.
When taking out such policies, it would be usual for most of us to take some advice on the benefits of doing so. Recently, some advice given in the 1990s on such a policy, has been the subject of court proceedings.
To relay the facts briefly, an Executor, appointed to deal with her late mother’s estate, complained that Birmingham Midshires financial consultants, an appointed representative of Friends Life Services Limited, gave her mother unsuitable investment advice.
Back in 1997, the mother was advised to take out a with-profits investment bond, with £36,828 life cover, to help mitigate against her inheritance tax liability. The Executor complained that the advice was not suitable as an inheritance tax liability didn’t exist as the land owned by her mother was agricultural land and therefore exempt from tax.
Friends Life rejected the complaint saying that the advice was suitable and if there was any issue the mother would have raised an objection at the time.
However, the Financial Ombudsman Service ruled the adviser had an obligation to establish whether there was an actual inheritance tax liability before giving advice about it.
Friends Life disagreed arguing the fact find had stated: ‘this has been checked out and because it is agricultural land and the son-in-law farms the land…there will be no inheritance tax liability.’
The provider, therefore, believed that the Executor and her mother were made aware that no inheritance tax was payable if the land was being farmed and they therefore could have challenged the need for inheritance tax cover if it wasn’t what they wanted.
However, it was also recorded on the fact find that the mother had a fairly substantial inheritance tax liability that the investment bond was likely to cover.
The Ombudsman Dara Islam said ‘ I don’t think the advice was suitable. Issues central to the point of inheritance tax liability –relating to the land and whether it was for farming- don’t seem to have been bottomed out. Friends Life said farmers tend to have greater knowledge than the average person, of minimising tax and obtaining tax breaks whilst this might be true for some farmers, I’m not persuaded this was the case with the mother. I appreciate that Friends Life said both the mother and the Executor could have challenged this at the time, but I don’t think they could have if they didn’t know the advice was unsuitable, and simply relied on that advice- as seems to be the case. Despite what Friends Life says, I’ve seen no other evidence that the mother was aware that she didn’t have an IHT liability (despite calculations) and chose to go ahead with the recommendation anyway.’
Friends Life was ordered to refund all premiums paid with 8 per cent simple interest from the date of payment to the date of settlement.
A cautionary tale for those providing such advice, though I feel it is quite right for those of us seeking guidance in these matters to expect such due diligence before reliance is placed on any such guidance.
The decision to take out a life insurance policy is more about the stage of your life you have reached than simply your age, and for some people it can still be an unnecessary cost. For example, those still renting property and with no dependents.
However, if you do have an estate to leave, particularly one whose value is over the current inheritance tax threshold of £325,000, and inheritance tax is potentially payable on your assets, one way to assist your family with a large tax bill is to buy a life insurance policy.
Whether calculated on a ‘term’ or ‘whole life’ basis, in exchange for premiums paid, a lump sum is payable on your death. Premiums can be variable or guaranteed, and such policies can be useful as long as the premiums continue to be paid. Such a policy will need to be ‘in trust’ for the sum assured to go to the beneficiaries and to not be subject to inheritance tax.
Some have termed this akin to a long-term savings policy for the kids, and it can provide cash for inheritance tax rather than force the sale of the family home or any other asset, as they pass outside of estate and are immediately payable to the beneficiaries.
As with all financial planning however, there is a risk that your circumstances, or the political landscape may change, and your assets may grow more quickly then you expected. On the other hand, the Government could make the inheritance tax allowance more generous, which could mean that any lump sum payable far exceeds any inheritance tax payable.
It should be noted that the Government has not changed the inheritance tax free allowance for the last eight years, though a new additional allowance did come into effect in April this year.
The ‘main residence nil-rate band’ gives each person £100,000 on top of the usual allowance in respect of their home. By 2020-21 it will rise to £175,000, meaning a married couple will be able to pass on £1m tax free. To be eligible to claim the relief, you must pass on your home, or a share of it to your children and grandchildren (direct descendants). The measures are still in their infancy, and a detailed discussion is beyond the scope of this piece.
However, what is highlighted by this new legislation, is that the Government quite clearly places a financial value upon marriage. Indeed, our social norms are still by and large dictated by the notion of family.
A recent case reported on by the BBC, depicts such an example. An NHS worker took the Government to court on the grounds that they had breached her human rights in denying her bereavement damages when her partner died from an infection that had not been detected. At present, a fixed sum of £12,980 is paid out if a person dies as a result of negligence, but only to spouses and civil partners.
Jakki had been with her partner John for 16 years. The Court of Appeal allowed her challenge to a High Court ruling, dismissing her claim that an award should be available to anyone who had been in a relationship for at least two years, and that the current legislation was in breach of the European Convention on Human Rights. The Law Commission has previously recommended that co-habiting couples should be eligible for bereavement damages and the Government even produced a draft bill in 2009, although this was never progressed.
Jakki won her legal battle for better rights for unmarried people who lose their long-term partners. Jakki described the current situation as ‘hurtful and unfair’ that her relationship should be seen as ‘less meaningful’, alluding to the fact that as she felt as though if ‘you weren’t married, you weren’t bereaved, it didn’t count.’ Jakki won’t receive a retrospective payment, but will the Government now change the current legislation?
I think it best to leave the final words to Mr Charles Dickens, author of The Hunted, a great tale based on the life insurance industry, and well worth a read, ‘A very little key will open a very heavy door.’
Written by: Claire Binnersley
Claire is a solicitor in our Private Client department, for more information on the services we offer or to get in touch us, please see our details below;
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