Since originating in the US over a decade ago, Private Placement Life Insurance has become an established wealth planning tool all over the globe. This feature outlines how PPLIs can help high net worth individuals and families deal with inheritance and succession issues in a tax-efficient way.

Under severe fiscal pressure to increase tax revenues, governments in the UK and many other countries are attacking many traditional succession and estate planning arrangements, reducing their advantages or even removing them completely.

HM Revenue & Customs is also making a sustained attack on people who use residence and domicile rules to reduce their tax bills, with recent landmark test cases severely undermining previously accepted “not ordinarily resident” and non-domicile rules.

As a result, many more advisors are turning to compliance-based solutions which have their foundations in the legal ownership structure of a life assurance policy.

While UK-based advisors will be familiar with the benefits of single premium cross-border life assurance policies, or portfolio bonds/offshore bonds as they are sometimes called, another life assurance-based solution has been growing rapidly in other countries.

PPLI (Private Placement Life Insurance) has become an established wealth planning solution in many parts of the world, including Asia and the Middle East, since originating in the US over a decade ago. It is now commonly used by wealth managers to provide investors with bespoke solutions for tax management, asset protection and estate planning.

UK applications

PPLI has now arrived in the UK, where it has similar planning applications, combining the well-known tax control and mitigation properties of a cross-border life assurance policy, such as the ability to take an “income” via the cumulative 5 per cent per annum tax-deferred allowance, with much higher levels of death benefit than available in retail markets.

The first EU life company to launch a PPLI product into the UK wealth management market is Luxembourg-based Lombard International Assurance. "The unique way in which life assurance contracts are treated for UK tax purposes creates significant tax planning opportunities,” says David Steinegger, Lombard’s CEO. “With a PPLI contract, the availability of high levels of life cover adds a further dimension, providing the protection and liquidity that many wealthy individuals need. Life assurance cover over £5 million can be difficult to source in the retail market, however wealthy clients often have requirements well in excess of this amount.”

PPLI contracts give wealthy clients extensive investment management freedom and access to their portfolio, but the real benefits come from the life cover aspects. High value life cover can be underwritten on either single life or joint life (first death and last survivor) basis, with the death benefit proceeds being available to heirs to meet inheritance tax liabilities, or meet debt or other financial obligations. Having a PPLI contract in place also expedites the probate process and other legal formalities on death, facilitating distribution of the estate to heirs.

Additional benefits

A PPLI product is also tax efficient in the way that the cost of the life assurance cover is funded, with the annual premium being met from gross investment returns within the policy, reducing the taxable benefit on surrender or death. This compares favourably with policies funded through regular premiums where contributions are made from income after personal taxation.

Advisors can use a PPLI policy to provide both UK resident domiciled and non-domiciled individuals with a range of potential benefits mainly focused on inheritance planning, typically with the proceeds of the life cover payable on death meeting the inheritance tax liability.

For instance, a UK “res dom” could invest £5 million into a PPLI policy as a long term investment plan and add an additional £3 million of life cover written on a joint life, last survivor basis. This does not restrict access to the capital or growth, but in the event of both dying, the life cover element will help to mitigate the impact of inheritance tax on the sum invested.

“Alternatively”, says Steinegger, “we can offer an assured legacy arrangement in which a PPLI policy with a high death benefit is structured with a simple loan trust, with income taken through 5 per cent tax-deferred withdrawals and any outstanding loan comprising the estate for inheritance tax purposes on death. Any investment growth would fall outside the taxable estate, as does the life assurance benefit.”

Steinegger’s comments are echoed by prominent tax planners in the UK. "The PPLI loan trust offered as part of the PPLI portfolio is based on sound and well established principles and provides an effective way of ensuring that future capital growth is enjoyed by the beneficiaries of the trust outside of the settlor's estate for inheritance tax purposes.  The same is true of any life assurance benefit written in trust, and payable on death," says Owen Clutton, a partner at City solicitors, Macfarlanes.

Tax mitigation

For the many wealthy “non-doms” living in the UK who are EU nationals and who are likely to return to their home country or another EU jurisdiction, there is another major benefit. Advisors using a PPLI to structure their non-dom client’s wealth can create a solution which acts as a tax shelter while UK resident, while at the same time complying with the tax rules of their home country, with any inheritance taxes due on death covered by the proceeds from the PPLI’s life cover. In many jurisdictions the proceeds of life assurance policies also receive favourable tax treatment.

Steinegger adds: “PPLI policies have been helping wealthy individuals and families in many parts of the world deal with inheritance and succession issues in a tax-efficient way for some time now. Now that this type of product is available in the UK market, it will have a strong appeal to advisors and their clients given the compliance-based tax planning opportunities it opens up.”