Those with family members in the UK will no doubt have been watching the tax changes being introduced by the UK government with a certain degree of concern. The abolition of the connecting concept of domicile for tax purposes - meaning that UK resident individuals will generally be taxed on a worldwide arising basis for income and gains and subject to UK inheritance tax (IHT) once they have been UK resident for 10 out of the previous 20 tax years as "long-term residents" – is a seismic shift in the UK's tax policy.
Since UK tax charges apply to income and gains on an arising basis, offshore life insurance bonds (already popular in Asia) are growing in popularity for those with UK connections as a 'wrapper' for investments to grow without a tax charge until the bond is 'cashed' in.
UK residents who are either considering staying in the UK post their eligibility for the transitional four year UK tax on foreign income and gains or not eligible for this relief are particularly enquiring as to such deferral options.
What are they?
Offshore life insurance bonds are essentially a series of identical, unit linked, single premium whole of life assurance policies. Whilst there is a limited element of life insurance, the main objective of the bond is to grow the value of the premium invested. The premium is invested under discretionary management – and whilst the level of risk appetite can be communicated, the policy holder cannot select or influence the selection of the investment themselves – as otherwise the policy could fall within a punitive set of taxing provisions applicable to so-called personal portfolio bonds.
How is investment growth taxed?
The bond is a 'wrapper' – so income and gains arising within the policy (including relating to UK assets) should not be taxed in the policyholder's hands as they arise. Income and gains can therefore be 'rolled up' and re-invested tax free allowing for greater growth.
Can I take money out?
One of the key advantages to offshore insurance bonds is that there should be no UK tax charge whilst a policyholder does not withdraw funds from it. However, they also benefit from an advantageous UK tax regime which allows 5% of the original premium to be withdrawn each year (so allowing 100% of the premium to be withdrawn after 20 years) without attracting a UK tax charge (although if the original premium was paid from untaxed monies, there could be a charge if funds are then remitted to the UK). There is no need to use this 5% 'allowance' each year – any unused portions can be carried forwards until the policyholder has need of the funds. However, if funds in excess of the 5% allowance are withdrawn, then the 'surplus' will be subject to UK income tax.
How flexible are they?
Provided no more than the 5% allowance is withdrawn (and there is not too much ability to influence investment choice), offshore life insurance bonds are very flexible. Whilst there is a taxable event on the death of the life assured, multiple lives can be assured – so there is scope to defer the charge for some years.
They can be held personally or within a trust – and can even be gifted (in whole or just selected units). Offshore life insurance bonds are non-UK property – with the result that gifts from parents to children may be IHT neutral whilst both parties are not long-term residents for UK IHT purposes. Recipients of gifts 'stand in the shoes' of the original policyholder when it comes to calculating the available 5% allowance, thereby allowing the gift recipient to be able to benefit from unused allowance. Further, if the product is written as multiple policies, it is possible just to gift those units with unused allowances.
Reporting advantages
As investment growth is taxed on a deferral basis, we do not expect that policyholders will need to provide details of the investment income and gains rolling up within the bond to HMRC. This will be welcome news to those UK resident taxpayers who are grappling with reporting the whole of their worldwide income and gains to HMRC for the first time.
A welcome option
For those with UK connections, offshore life insurance bonds are expected to become a more popular option for UK tax planning and in various respects.
