By Simon Gorbutt, Director of Wealth Structuring Solutions, Lombard International Assurance S.A. and Stuart Robertson, Senior Wealth Planning Consultant, LIA Wealth Advisers,

Many investors have recently suffered losses in the investment markets, and portfolio gains built-up over a number of years may have fallen. Investors find themselves at a crossroads – trying to remain agile and adapt to volatile investment markets, while wondering how the future will look.

Wealthier private clients frequently prioritise protecting their wealth over taking on risk to maximise their returns. Research shows that 75% of high net worth (HNW) individuals see future-proofing their wealth as more important than ever, while conserving assets for their future was the top investment goal.[1] For this group, preserving their lifestyle and passing on wealth to the next generation is key, but these are goals that can become more challenging in adverse market conditions. There are, however, alternative wealth planning options, including tax deferment structures, that can help to achieve those goals.

For UK investor clients, whether they are non-domiciled (RND) or Deemed Domiciled investors, the prospect of capturing future investment gains in a gross roll-up vehicle is an attractive opportunity.

This has never been more true given that as Chancellor Sunak unveiled his huge rescue package for UK business and workers back in March, he warned that it would come at a cost. He issued a direct warning that the price of the package would include the future loss of tax and national insurance perks and he has also hinted at wider tax hikes in future, saying that everybody would be ‘chipping in’.

So, what are the benefits to advisers and their clients of EU portable and investment-based life insurance (EU life policies) structures given that RND and Deemed Domiciled investors are just as likely to be affected by future tax hikes as other groups in the UK population.

1. Deemed Domiciled investors with pots of Clean Capital may have been paying Income Tax on income arising

The recent fall in investment markets could reduce or eliminate capital gains, providing investors with another chance to move funds into EU Life Policies. Subsequent gains within such policies will also comprise Clean Capital. Any policy can be offered as security for a loan if the investor requires access to funds in excess of the cumulative 5% tax deferred withdrawal allowance. There are no remittance issues if the funds are used in the UK.

2. Protected Trusts

Protected Trusts (established by RND’s prior to acquiring deemed domicile) protect Deemed Domiciled persons from tax in respect of trust income and gains provided the trusts are not tainted, for example by additions.

Trustees of protected settlements can dispose of interests in non-reporting funds and move the proceeds into EU Life Policies used as holding vehicles for future purchases and redemptions of similar funds.

3. The Protected Trust tainting rules do not apply to EU Life Policies

The Protected Trust tainting rules do not apply to EU Life Policies, as tax deferral is provided by life policy tax rules in respect of future investment gains. Tainting is therefore less of a concern if funds are added to a Protected Trust where an EU Life Policy is the only, or one of few investments.

4. The accrued income scheme

Where a security such as a bond is sold with accrued interest, the proceeds that represent this accrued interest is deemed to be income for tax purposes. Such deemed income is likely to be unprotected if the asset is redeemed before maturity, or before an interest payment date. This problem can be avoided if the holding vehicle is a properly structured European Life Policy, and now may be the time to consider such planning.

5. Life policy investments and the fixed annual 5% tax deferred withdrawal allowance

For life policy investments, the annual 5% tax deferred withdrawal allowance (“the allowance”) is fixed according to size of premium payment. Any fall in the value of an underlying portfolio because of volatile investment markets will not affect the allowance, assuming there is sufficient policy value to cover payment.

6. Investing today may increase the value of future planning options

For example, the future gift of a policy, or policy segments, is not a taxable event.  Contrast this with a future gift of directly held securities which could crystallise a taxable gain.

As challenging as recent markets have been, there are opportunities, and clients could well benefit from more knowledge of offshore life insurance policies to protect and pass on their wealth.

[1] https://www.prnewswire.com/news-releases/high-net-worth-individuals-say-its-more-important-to-future-proof-wealth-than-ever-before-as-they-plan-for-an-extended-retirement-300916288.html