For many of the reasons outlined in the previous article in this series, such as changes to remittance basis charges and the concept of deemed domicile, some leading private client lawyers and international accountants are now looking to use a long-ignored, but particularly effective, wealth planning structure: international wealth insurance, more commonly known in the UK as an offshore bond.
Insurance structure
The insurance structure of this bond has several very positive attributes when working with UK resident non-domiciles (UK RNDs) and with wealthy individuals who are internationally mobile.
Wealth insurance has a very specific tax regime in the UK – chargeable event legislation – that was first introduced in 1968 and most recently updated in the Income Tax (Trading and Other Income) Act, or ITTOIA 2005, chapter 9, part 4.
These rules have been reviewed several times during their 50-year history and each time have been reinforced and re-embedded into the legislation.
Crucially for this client segment, civil law jurisdictions also have very clear regulation around wealth insurance, delivering tax deferral, reducing the longer-term tax burden and, in some countries, reducing succession taxes.
Nothing says, ‘I have made plans to leave’ more than a structure that is fundamentally understood and has known regulatory and beneficial tax positioning in just about every other country in Europe and across much of the globe.
The insured structure negates the need for multiple segregated accounts to hold various incomes, gains and capital. All gains are offset by losses as they occur.
Wealth insurance also removes the need to avoid investing in UK situs assets, which is better for ‘UK PLC’ and carries less risk of an accidental remittance tax issue.
However, care is still needed with regard to the underlying investments and how these are selected. To avoid a highly personalised bond structure, if the client/policyholder wishes to select the underlying assets, they will be restricted to choosing from open-ended collective funds only.
Alternatively, they can agree a clear mandate with an appropriately qualified asset manager who will then select from a much wider pool of assets but at their total discretion and without influence from the policyholder.
Tax implications
By itself, wealth insurance does not reduce UK inheritance tax (IHT). This is why the establishment of a protected trust for a UK RND, prior to becoming deemed-domicile, is still a crucial part of their planning.
But combining the trust with wealth insurance will provide a much greater capacity to later transfer the policy cross-border and, where necessary, remove the trust structure while still maintaining a recognised tax deferral vehicle in the new jurisdiction.
It is also important to recognise all taxable withdrawals from the insurance structure are on the arising basis of tax and fall within the income tax regime, even for UK RNDs.
The remittance basis of tax is not applicable here but it does mean that if a UK RND’s offshore assets are liquid and investable they might choose to hold them via the insured structure and so avoid paying £30,000 ($38,400, €33,900) or £60,000 to claim the remittance basis of tax.
The Finance No 2 Act 2017 also introduced two transitional arrangements or relief opportunities:
- Those who become deemed-domicile for all tax purposes as at 6 April 2017 can rebase directly held assets, effectively revaluing these assets for capital gains tax purposes at 5 April 2017; and
- There is an opportunity, open to all UK RNDs but only until 5 April 2019, which offers the chance to ‘cleanse’ or untangle mixed/tainted assets by identifying originally clean, or rebased, capital and then switching into a new clean account.
Both of these arrangements offer the possibility for UK RNDs to uncover pockets of clean capital that might then be best managed via an offshore insurance structure.
Indeed, any separated ‘income’ might also be placed into a separate policy, for ongoing tax deferral and potential opportunities to slowly lose the unremitted tax charges.
Regulatory impact
While the tax and legal professions are now turning to the offshore bond as part of the ongoing planning for their wealthy UK RND clientele, its introduction causes them an administrative problem.
Under FCA rules, the offshore bond is a regulated product and must be positioned by an adviser with suitable permissions. Few, if any, have these permissions.
While in the past they may have simply turned to a cross-border insurance provider, a combination of RDR, Mifid II and the Insurance Distribution Directive means they need to align with top-quality financial advisers in order to deliver the advice.
There are a small number of European Economic Area passported specialist advisers already interacting with some of the larger firms but, if UK IFAs are willing to grow their knowledge around the cross-border aspect of the offshore bond structure and the needs of UK RNDs, including deemed domiciles, a clear and attractive opportunity awaits.
Key benefits
From a technical perspective, the most relevant benefits of using wealth insurance for all UK tax resident clients, including UK RNDs, are as follows:
- Ability to defer and then control when, where and who pays the tax.
- Ability to withdraw up 5% pa tax efficiently. Care needed for UK RNDs as 5% will only be tax-free in the UK if the original investment was made with clean capital.
- Ability to assign or gift all or part of the policy, using segments, to other family members who might have a lower tax rate at point of encashment.
- Ability to apply for time apportionment relief, which will reduce the tax liability for any periods of tax residence outside the UK as a percentage of the overall period the policy has been in force.
- Ability to use a top slicing relief to reduce a potential liability to higher rate and/or additional rate tax on the gain, at least partially. This is achieved by dividing the taxable part of the withdrawal by the full number of years the policy has been in effect (the top slice divisor).
Further reading:
Getting to grips with UK resident non-dom tax rules
By Mike Foxall, marketing consultant, Wealins
