Insurance products have been utilised for many years now by tax advisors as a useful tool in structuring client’s affairs. Insurance products are often used as a platform to create an income return where this suits the profile of the individual. They can also potentially be used for UK resident but non-domiciled individuals where trusts cannot be used. They are also often used as a means to separate ownership and control over assets away from the client. We outline below some of the uses to which insurance policies are put to serve as a reminder of how important this product can be for appropriate planning strategies.
Insurance—How Does It Work?
Life assurance is a contractual arrangement whereby a premium is paid to an insurance company who in return issue an insurance policy. The insurance policy provides for certain contractual entitlements to be payable to the owner of the policy on stipulated events taking place. Those events are the death of the people whose lives are assured under the policy as well as the early surrender of the policy. The policy contains an element of life cover, the exact amount depending on which insurance company provides the policy.
What is the legal position?
People commonly refer to assets being held within insurance bonds; this description is not strictly correct and it is this difference that makes them useful for tax planning purposes. Assets or premiums paid to insurance companies are legally and beneficially owned by the insurance company. In other words the assets invested in a life contract are entirely separated from the policyholder. The assets or premium may however be used by the insurance company to notionally determine benefits payable to the policy holder under the insurance policy.
Removing Control ?
Because of the nature of insurance policies and the ownership of assets being with the insurance company this should not be capable of being regarded as similar to a settlement or trust type relationship. Even in the case of highly personalised insurance policies assets are held legally and beneficially by the insurance company, albeit the value of the policy is notionally linked to the assets. As a result assets held by the insurance company and which are linked to the insurance policy held by the client should not be regarded as controlled by the client. This can give rise to planning opportunities particularly in terms of potentially preventing companies that are undertaking transactions between them from being regarded as connected or controlled by the client for the purposes of certain anti avoidance tax legislation. It can also mean that capital, plus potentially income, profits on assets that are sold by the insurance company or within the insurance policy structure cannot be taxed on the policy holder.
Insurance Policies to defer timing of profits?
We have seen Insurance policies used as part of strategies where the client was intending to leave the UK at some time in the future and in the meantime organised assets that were expected to significantly increase in value to be held in insurance policy type structures. This strategy was used to allow the assets held in the structure to grow in value and be sold at a time before the client leaves their country of residence but for the client to wind up the insurance policy in a tax efficient manner after leaving their country of residence. This scenario was intended to allow profits to be retained in the bond structure in a potentially tax free environment until the client was ready to leave their country of residence.
Insurance Policies to create income or capital profits?
We have also seen insurance policies used to allow flexibility in having profits treated as either income or capital for tax purposes. In some cases it has suited clients to have profits that would otherwise be treated as capital profits instead to be treated as profits for income tax. We have also seen situations where profits were required to be capital in nature. The personal portfolio bond structure proved to be particularly flexible in allowing advisers manage exactly how profits arose in either circumstance and this remains the case today.
In the UK for more than Seventeen Years?
Where an individual is already deemed domiciled for UK inheritance tax purposes then it is generally not cost effective to utilise trust structures. It can be worth considering using insurance bond structures in such cases as these can mimic trusts in certain ways. Such structures can defer exposure to UK tax on capital gains, plus potentially income, until the structure is finally unravelled. Essentially these structures act to block capital gains, as well as potentially income, arising within the structure from being taxable on the UK resident owner of the insurance policy. It is possible that using insurance bond structures can also mean that the remittance basis charge may not need to be paid in relation to any income or gains arising within the bond structure. The annual remittance basis charge is now significant for those individuals who have been resident in the UK for in excess of 12 years. In these circumstances bond structures are worth considering for non-UK domiciled individuals particularly where they are not able to utilise trust structures.