In addition to beefing up HMRC resources and imposing requirements on tax planners to notify HMRC when new planning arrangements are developed in advance of implementing them, draft legislation currently under consultation in the UK would go as far as imposing financial penalties on advisers who point out to clients how to use statutory exemptions and reliefs to minimise their tax bills!
HMRC is also making a sustained attack on people who use residence and domicile rules to reduce their tax bills, with recent landmark test cases severely undermining previously accepted ‘not ordinarily resident’ and non-domicile rules.
Compliance-based tax planning
In the face of the uncertainties now facing more aggressive forms of tax planning, many more advisers are turning to compliance-based solutions which have their foundations in the legal ownership structure of a life assurance policy.
With new business inflows of almost £6bn in 2009, it is clear that UK-based advisers and their clients are familiar with the tax mitigation benefits of single premium cross-border life assurance policies. A large proportion of this business is inheritance planning, with the bond written in conjunction with a trust.
Private placement life insurance (PPLI) provides another solution. A single premium life policy, it provides wealthy clients with high value life cover whose death benefit proceeds can cover any inheritance tax due on the investor’s estate. The focus is on providing financial security by providing funds to meet the tax liability rather than trying to minimise or avoid it.
PPLI solution
PPLI has become an established wealth planning solution in many parts of the world, including Asia and the Middle East, since originating in the USA over a decade ago. PPLI is now commonly used by wealth managers to provide investors with bespoke solutions for tax management, asset protection and estate planning.
In the UK, the unique way in which life assurance contracts are treated for tax purposes creates significant tax planning opportunities.
A PPLI contract combines the well-known extensive investment management freedom and tax mitigation properties of a cross-border life assurance policy, including the ability to take an ‘income’ via the cumulative 5% per annum tax-deferred allowance, with much higher levels of death benefit than available in retail markets.
The availability of high levels of life cover with a PPLI contract provides the protection and liquidity that many wealthy individuals need.
Life assurance cover over £5m can be difficult to source in the retail market, however wealthy clients often have requirements well in excess of this amount if they want to ensure that their heirs can meet inheritance tax liabilities or other financial obligations. Having a PPLI contract in place also expedites the probate process and other legal formalities on death, facilitating distribution of the estate to heirs.
High value life cover
With a Lombard PPLI policy, high value life cover can be underwritten on either a single life or a joint life (first death and last survivor) basis, with cover available up to age 100 years. The high PPLI life cover can be reduced or removed at any time, if no longer required. Increases in cover are also possible.
The levels of available life cover will normally reflect lifestyle cover (related to the commuted value of lost future earnings or income), inheritance tax cover (usually be limited by the taxable net value of the client’s estate) or debt/loan cover (limited by the amount of debt which can be directly attributed to the client e.g. mortgage debt).
Of course, given the high levels of available cover, financial and medical underwriting is mandatory. Lombard smooth the underwriting process with a third party executive service aligned to the busy lifestyles of wealthy clients.
The lifetime surrender value (cash value) will be equal to the market value of the selected investments after the deduction of any early surrender penalties.
Tax-efficient premiums
Traditional whole of life policies and other unit-linked plans set a level premium which is then paid annually throughout life.
A PPLI policy offers competitive single premium costed life cover which is priced and paid for annually, reflecting the precise cost of cover for the next policy year, with age, sex and mortality risk influencing the premium payable. The client is ultimately responsible for ensuring that there is sufficient value in the policy to cover higher mortality costs in later years.
Lombard’s PPLI product is also tax-efficient in the way that the cost of life assurance cover is funded, with the annual premium being met from gross investment returns within the policy, reducing the taxable benefit on surrender or death. This compares favourably with traditional life policies where premiums are paid from the policyholder’s net income.
Extensive client benefits
Advisers can use a PPLI policy to provide both UK resident domiciled and non-domiciled high and ultra high net worth individuals with a range of potential benefits mainly focused on inheritance planning, typically with the proceeds of the life cover payable on death meeting the inheritance tax liability.
For instance, a UK ‘res dom’ could invest £5m into a PPLI policy as a long term investment plan and include an additional £3m of life cover, written on a joint life, last survivor basis. This does not restrict access to the capital or growth, but in the event of both lives assured dying, the life cover element will help to mitigate the impact of inheritance tax on the sum invested.
Alternatively, a client could benefit from having a PPLI policy with a high death benefit structured with a simple bare or discretionary Loan Trust, with income taken through 5% tax deferred withdrawals and any outstanding loan comprising the estate for inheritance tax purposes on death. Any investment growth would fall outside the taxable estate, as would the life assurance benefit.
This type of arrangement, which Lombard calls an ‘Assured Legacy’ plan, is based on sound and well established principles and provides an effective way of ensuring that future capital growth is enjoyed by the beneficiaries of the trust outside of the settlor’s estate for inheritance tax purposes.
For the many wealthy ‘non-doms’ living in the UK who are EU nationals and likely to return to their home country or another EU jurisdiction, there is another major benefit.
Advisers using an EU-based PPLI to structure their non-dom clients’ wealth can create a solution which acts as a tax shelter while UK resident, whilst at the same time complying with the tax rules of their home country, with any inheritance taxes due on death covered by the proceeds from the PPLI’s life cover. In many jurisdictions, the proceeds of life assurance policies also receive favourable tax treatment.
While PPLI may be new to the UK market, its unique combination of benefits for many types of wealthy clients will see advisers using its high life cover, sophisticated wealth management and inheritance tax planning options to provide secure financial planning solutions for years to come.
KEY POINTS
PPLI can provide HNW/UHNW investors with high value life cover
Funded estate planning provides the means to pay taxes rather than avoid them
