Advisers and wealth managers are turning to life structures to hold their non-domiciled clients’ assets
Advisers and wealth managers have been busy dealing with their wealthy foreign national clients in the UK across the last year as fundamental tax changes seek to compound the effects of the downturn in financial markets.
The UK has, for many years, been a highly attractive place to live for foreign expatriates, both in general and specifically for financial reasons.
Individuals resident, but not domiciled, in the UK have traditionally enjoyed the ‘remittance basis’ of UK taxation, only paying UK income or capital gains tax when they remit overseas income or investment gains to the UK.
However, this benign tax regime changed with legislation introduced by the Finance Act 2008. Since then, wealthy ‘non-doms’ have been able to continue to access the remittance basis, but they have no UK personal allowances for income tax and no annual exempt amount for CGT.
In addition, any non-doms who have been resident in the UK for more than seven out of the past 10 years can only choose the remittance basis if they pay an annual tax charge of £30,000. The alternative of being taxed on all their worldwide income and gains, whether these are remitted to the UK or not, is not generally an attractive option.
With the effectiveness of other structures such as trusts and non-UK companies being eroded, cross-border life assurance policies are emerging as the tax-efficient legal ownership structure of choice for holding non-doms’ assets.
Life assurance contracts can play an important role in helping advisers to manage their UK resident non-domiciled clients’ investments, providing an alternative to paying UK taxes or electing for the remittance basis of taxation, while allowing them to retain their existing investment management arrangements.
The use of life assurance contracts with non-doms has been endorsed by leading lawyers such as Paul Whitehead, a partner at Berwin Leighton Paisner LLP, a premier law firm headquartered in the City of London: “The unique way in which life assurance contracts are treated for UK tax purposes creates significant tax-planning opportunities for UK resident individuals. The recent changes in UK taxation, which mean capital gains tax charges can arise when distributions are made by offshore trusts to UK resident non-UK domiciliaries, have made tax efficient investment more difficult. The range of investments that enable an individual to prevent a tax charge on funds used in the UK has also been considerably reduced. As a result, life assurance contracts are even more attractive for UK non-domiciliaries, providing a level of flexibility for investment and potential tax efficiency that is not possible to match in any other way.”
Holding assets in a life assurance structure means these investments do not create any liability to UK income tax or CGT provided that no withdrawals are made in excess of the cumulative 5% per annum tax deferred allowance, and provided that no other chargeable events occur. This can be a considerable benefit to a UK non-dom, as Paul Whitehead points out: “For example, the rules would allow an individual to place, say, £5m into a life assurance contract, which can be invested in a wide range of investments under a discretionary mandate, and to withdraw up to £250,000 per annum for 20 years to use in the UK without a UK tax charge.” This assumes that the life assurance policy premium comprised ‘clean’ capital.
There is another major benefit for the many wealthy non-doms who are EU nationals and who are likely to return to their home country or another EU jurisdiction. Advisers using a European life assurance contract to structure their non-dom client’s wealth can create a solution that acts as a tax shelter while UK resident while at the same time complying with the fiscal rules of their home country.
Finally, there is another important consideration for a UK resident non-dom in that any assets they own in the UK are subject to IHT on death. Helpfully, a Luxembourg, Ireland or Isle of Man-based life assurance structure is not a UK-situated asset.
It is clear life assurance contracts provide a major opportunity for advisers to make a real difference by bringing certainty to their non-dom clients’ financial planning while retaining the flexibility to continue with existing investment arrangements and make changes to portfolios at any point in the future.
A final piece of sensible advice for advisers from Paul Whitehead: “The rules on the UK taxation of life assurance contracts are complex and there are pitfalls that can be very costly to fall into, so it is important to take expert advice and to use an experienced high-quality provider who knows how the system works.”
David Steinegger, CEO of Lombard International Assurance SA
