Independent view

Planning for Uncertainty

Julian Melling, Swiss Life

Julian Melling of Swiss Life suggests an offshore bond, or Life Wrapper, can offer tax benefits to UK residents to mitigate the effects of economic uncertainty.

With Brexit looming and the possibility of a change of UK Government on the horizon, some have begun to consider planning that will further protect their wealth. There are those considering leaving the UK, and how this can be achieved quickly and efficiently whilst perhaps still holding UK assets within their portfolios.

No one can say at this time what may happen, but the possibilities could include Capital Controls, Wealth Taxes, and increased taxes in general.

Some will remember back to the 1970s when you couldn’t travel abroad with much cash, but more importantly you couldn’t purchase foreign securities. Can you imagine today not being able to hold US stocks in a portfolio, or pay the bills for your villa or gite? People are mobile and many plan to retire outside the UK and will require access to their wealth wherever they are.

Of course, there is the possibility that things remain much the same, any planning must be flexible and have benefits either way. Ideally the solution will allow wealth to be held outside the UK, be tax efficient, can invest in foreign assets, and be recognised favourably by a new home country if a relocation occurs. It must also be robust in the face of any aggressive UK tax changes.

A possible solution to consider taking advice on is the use of an EU (usually Luxembourg as it is a sovereign state, not a dependency) issued Life Wrapper (sometimes called a life policy or offshore bond) to hold a portfolio. Life Wrappers are an established part of the UK financial planning landscape and well recognised and accepted for tax purposes. They are also well recognised in many other jurisdictions, usually with relatively good tax benefits.

A Life Wrapper is basically a life policy designed to hold portfolios. A person or legal entity (the policyholder) can apply for a policy and invest their assets into it (the premium). The assets then become the property of the life company in exchange for the rights to the value of the assets given to the policyholder. The policyholder has the right to request the value at any time. If appropriate, the actual assets rather than value can be returned upon request.

In the UK, Wrappers such as this are taxed under the Chargeable Events regime – meaning the value of the policy grows without taxation, 5% of the original value can be taken per annum with no tax to pay, and marginal rates of income tax apply to any future taxable events, such as full surrenders or withdrawal over 5%. If you leave the UK the rules that apply are based on your new residence status.

The Life Wrapper allows one to plan for uncertainty

  • Currently a UK resident can invest in an EU issued Life Wrapper using their existing portfolio, retaining their existing portfolio manager – the transfer of assets may be a disposal for tax purposes (unless cash)
  • Tax rules on policies can usually only be effected on new policies, not existing – meaning that tax changes cannot affect existing policyholders, only policies written after that date
  • When setting up a policy the assets become the property of the policy issuer, the policyholder owns the right to the value – allowing investment into a broad range of global assets as these are traded in the name of the insurer
  • The reference currency of the wrapper can be GBP, USD, EUR, or CHF, the underlying assets can be in any currency
  • Payments out can be made in any currency to an account in the name of the policyholder anywhere
  • Assets are held in custody by a third party, usually a highly rated bank, outside the UK
  • The policy can be settled into a trust if required for further succession planning, without creating a disposal
  • Under Luxembourg Law, if the custodian bank or insurer become insolvent the policyholder has first rights and assets are held on a segregated basis ensuring 100% protection
  • The policy is portable to many other jurisdictions, more so than Trusts and Corporate structures, with most countries offering beneficial tax treatment for life wrappers
  • Current UK tax rules only discern between local and foreign life wrappers, there is no EU specific category – Brexit will not affect the status of the life wrapper

If Brexit is a fiscal success and there are no substantial tax changes in the UK, the policy can still be of benefit. Its use can add a layer of control when it comes to tax and succession planning; for example, deferring income tax until a policyholder is a basic rate payer, or making a gift (a Potentially Exempt Transfer in most cases) of the policy without creating a disposal. Of course, each case needs to be considered on its merits within a holistic plan.

For further information on offshore bonds please visit Alternatively, to discuss any wealth planning issues, please contact your investment manager who can arrange a meeting with one of our wealth planners.

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