Non-doms are coming under pressure with further moves by the UK to tighten rules. This creates potential openings for insurance-based solutions, practitioners say.

With news that the UK government intends to press on with changes to the non-domiciled system (see story here) it raises questions over whether some of the tools wealth managers have used to help clients mitigate tax are fit for purpose any longer. It is time, perhaps, to check on the options available, industry practitioners say. 

Insurance-based wealth planning solutions are likely to gain a boost because of their being recognised in a number of contrasting jurisdictions, Simon Gorbutt, associate director of Wealth Structuring Solutions at Lombard International Assurance, told this publication recently. (Lombard International Assurance is owned by private equity and alternatives investment house Blackstone. See an article here for recent financial results.)

“This is a key moment for the sort of solutions that we offer,” he said.

The changing rules on non-doms, coupled with measures by the UK and others to squeeze certain tax planning opportunities, means there is a need for solutions that work outside majority Common Law countries such as the UK or which are recognised in places with different legal or tax codes, Gorbutt said. This is particularly the case when so many wealthy individuals looking to live in the UK – or leave – are having to think about whether a wealth solution developed in one country can migrate to another. While the UK government is pushing ahead with changes to the non-dom system - delayed by the recent UK general election - it would be a mistake to suppose the system will not be reviewed again in future, he said. Also, given the uncertainties around the country’s political position as well as Brexit, other changes affecting wealthy individuals could occur, he said.

Gorbutt is not alone in claiming that there is some evidence that insurance could play a greater role in wealth structuring than has been the case. "Our research indicates that most HNWIs use life insurance for financial security but what is perhaps less understood is that it is a solution for tax efficiency and structuring," Mark Miles, who is European head of wealth management for Maclagan, and and global head of Scorpio Partnership, told this publication. (Scorpio is wholly owned by McLagan, and in turn, Aon.) "There is an opportunity for them [the life insurers/assurers sector] to do a better job at explaining what they do," Miles said.

A number of firms, such as OneLife, (based in Luxembourg, like Lombard International Assurance); Swiss Life and Vie, offer structures based around insurance policies. The sector is gaining traction although not yet a highly visible feature in the market. This publication has spoken to practitioners before about the sector (see here). 

One difficulty in forming a judgement is that such wealth solutions are highly "bespoke" and therefore comparing their value with, say, trusts or foundations is difficult because of a lack of standardised data on setup costs. 

Remittance basis
As far as Lombard is concerned, Gorbutt said it offers solutions that can make it unnecessary for a non-dom to elect the remittance basis, thereby freeing them of the cost and complexity associated with segregating accounts abroad and the danger of unwitting taxable remittances. (The "remittance basis" is an alternative tax treatment available to people who are resident but not domiciled in the UK and who have foreign income and capital gains. Under the system, such persons pay an annual levy, which rises based on length of residence, if they want their worldwide gains/income to be free of UK taxes.)

Lombard said it also offers ideas such as its Accumulation & Maintenance Plan, that allow clients to achieve succession objectives via gifts while simultaneously granting control over how wealth is accessed by the next generation. The idea is that for clients who have already become domiciled or are deemed to be domiciled, this type of solution also serves to reduce the taxable estate for inheritance tax purposes while retaining a degree of control. Alternative structures often achieve this result but, Gorbutt said, at the expense of a larger tax bill or at the risk of challenge from a foreign authority following a change of residence.

Gorbutt said individuals live in times of uncertainty, making new or tried and tested wealth structuring tools even more important than before. “The remittance basis [treatment of non-domiciled residents’ foreign income and gains] could eventually be removed altogether,” Gorbutt said.

For some non-doms, they will now be deemed UK-domiciled for tax purposes, exposing them to the prospect of taxation on a worldwide basis, and insurance-based solutions will come into play, he said.

“An insurance policy is, at its simplest, a contract between two parties and free of many of the constraints involved with other structures,” Gorbutt said. Insurance contracts aren’t restricted to being recognised in just one or a few jurisdictions (such as the country in which they were drawn up) although there are subtle differences in how they are treated, for example in terms of the end-client’s ability to affect the investments on which a policy is based, or the required level of life cover (in countries such as Finland and Sweden, there is relatively high investor access and control, and less so, with certain caveats, in the UK. Conversely, the UK does not insist on the life cover required in certain other jurisdictions). 

To illustrate his points, Gorbutt gave the following case study, featuring a Spanish person by the name of “Mr Perez” as an example. Perez, who is Spanish, is married with two children. He is a UK resident deemed domiciliary living in London with his family. He wants to set aside a portion of his wealth for each child while controlling when they can access the value of the gift; allow his children a limited annual allowance; reduce the value of his estate for inheritance tax purposes; achieve gross roll-up in respect of linked investments, and ensure the solution continues to deliver benefits should the family return to Spain. Responding to these goals, Lombard said it has a Luxembourg life assurance policy for each child with special policy provisions, which are specified at the outset. These prevent access to the full value of the investment until a date of the donor’s choosing such as when the children reach age 30 or any other age that Mr Perez thinks appropriate. Each life policy allows an annual withdrawal of up to 5 per cent of the amount invested to be taken by the child. The life policies are subscribed by Perez and gifted to the children.

As a result, Perez has made potentially exempt transfers for inheritance tax purposes by gifting the policies to his children. He has exercised control at the outset as to when they can access the wealth. An annual allowance can be taken by way of tax-efficient withdrawals from each contract. Income and gains from investments to which the life policies are linked arise without the deduction of tax (other than any non-reclaimable tax withheld at source). Because the policies already incorporate the requisite Spanish features, on a return to Spain, they are treated in the same manner as domestic Spanish insurance contracts. Lombard added that Perez might have achieved a similar result via trust-based planning although, depending on the sums involved, he may have incurred an immediate and periodic inheritance tax liability and, on the family’s eventual return to Spain, a trust may have attracted further tax exposure or even been disregarded.

This publication asked Lombard how much such a wealth structure costs to set up; it said it was not possible to give a specific answer and said it depended on complexity, restrictions and complexity of a particular structure.