Swiss Life LAP UK has historically been used in the UK to control tax within the HMRC's rules. However, some of its features have prompted advisers to consider how they might help protect wealth in the current environment.
Every day, it seems the world is becoming more uncertain. The votes of 634,751 people for Brexit are already beginning to have global significance beyond the UK. Many are concerned the country's government will change, bringing potential issues for people's wealth.
To minimise risk, people are looking for solutions, from moving assets offshore to leaving the UK. But how can they do this quickly and efficiently while perhaps still holding UK assets in their portfolios? And what if they're planning to return to the UK in the future?
No one can predict what will happen over the next year. The changes might mean capital controls, wealth taxes, and tax increases generally.
We are already working with clients who have these concerns. Many remember the 1970s when people couldn’t travel abroad with much cash and, more importantly, couldn’t purchase foreign securities. Can you imagine today not being able to hold US stocks in a portfolio, or transfer money to fund a global lifestyle? Such actions also affect stability. People are mobile and many plan to retire outside the UK, and so will need access to their wealth wherever they are.
Of course, it is possible that things will remain much the same. So any planning must be flexible and benefit people either way. Ideally, the solution will allow clients to hold wealth outside the UK legally and tax-efficiently, while enabling them to invest in foreign assets. Equally, if they relocate, their new home country should recognise the solution. It must also be robust in the face of any aggressive UK tax changes.
A possible solution to consider is the Swiss Life LAP UK (sometimes referred to in the UK as a life policy or offshore bond) to invest in portfolios. Life insurance solutions are well-established in UK financial planning, and recognised and accepted for tax purposes. Many other jurisdictions also recognise them, usually with relatively good tax benefits.
Swiss Life LAP UK is designed to invest in portfolios, which are usually managed by a private bank or investment manager. 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 life company can return the actual assets rather than the value, upon request.
In the UK, life products like this are taxed under the 'chargeable events' regime. This means the policy's value grows without taxation (apart from some withholding taxes); the policyholder can take 5% of the original value every year with no tax to pay; and marginal rates of income tax apply to any future taxable events, such as full surrenders or withdrawals over 5%. If the policyholder leaves the UK, the rules that apply are based on their new residence status.
Swiss Life LAP UK allows people to plan for uncertainty:
Currently, a UK resident can invest in an EU-issued life insurance solution using their current portfolio and retaining their existing portfolio manager. The transfer of assets may be a disposal for tax purposes (unless cash, or the policyholder is not currently subject to UK tax on offshore assets).
Tax rules governing policies can usually only be imposed on new, not existing, policies. This means existing policies cannot be affected – only policies written after that date.
When setting up a policy, the assets become the property of the policy issuer (the insurer) and the policyholder owns the right to the value. This allows the policyholder to invest in a broad range of global assets, because they are traded in the insurer's name.
The life insurance solution's reference currency can be GBP, USD, EUR or CHF. The underlying assets can be in any currency.
Payments out can be in any currency to an account anywhere in the policyholder's name.
A third-party holds the assets in custody – usually a highly rated bank outside the UK.
To help plan passing on wealth (succession planning), the policy can be settled into a trust, without creating a disposal.
The policy is portable to many other jurisdictions – more so than trusts and corporate structures. Many countries also offer beneficial tax treatment for life policies.
Current UK tax rules only discern between local and foreign life insurance solution. There is no EU-specific category – Brexit will not affect the tax status of existing life policies.
What if Brexit is a fiscal success and there are no substantial tax changes in the UK? The policy can still benefit people by giving them more control over tax and succession planning. For example, it can defer income tax until a policyholder is a basic-rate taxpayer (or assigning between spouses); and it allows policyholders to make a gift (a 'potentially exempt transfer' in most cases) from the policy without creating a disposal. Currently, life policies benefit from 'time apportionment relief'. This means policyholders can use periods of non-residence to reduce tax on gains. However, each case must be considered on its merits within an all-encompassing financial plan.
For further information on the advantages Swiss Life LAP UK offers as a wealth transfer and succession planning tool please contact us email@example.com
Where do you see the opportunities?
The increased mobility of individuals and their need for more flexible and cross-border compliant solutions creates opportunities for Swiss Life. The transparency and CRS eliminates reputational and tax risks of using EU-based asset managers and insurance providers; and enhances the mobility of capital. At the same time, long-term secured asset management is becoming more important.
Swedes are a travelling people that often spend some time working abroad or settling abroad when they retire. So, there is demand for flexible cross-border pension solutions. All this makes a company like Swiss Life attractive on the Swedish market, since we can add value where domestic companies can’t.
Are there any threats now and in the near future?
In Sweden, competition is always a threat you deal with. The domestic insurance providers are always very aware of the market. If Swiss Life and other international providers have an advantage today, the domestic providers may want their slice of this business too.
Another issue is political stability and taxation. Today, life insurance is subject to beneficial taxation rules. With the political climate changing constantly, these tax rules may change. However, currently, there is no indication of any imminent changes to the tax rules for insurance policies.
Overall, the key advantages for Swedish residents using life insurance policies are:
There are a number of benefits for Swedish residents. They can be summarized in three main benefits:
- The opportunity to plan succession and secure the transfer of assets in the family or to designated beneficiaries.
- Easy administration and reporting – only one line is needed in the tax return instead of reporting every single transaction. This is especially valuable if you are trading in non-Swedish securities and currencies.
- Beneficial taxation – an annual yield tax based on the policy's value instead of taxation on growth provides a very beneficial taxation model where any withdrawal is tax exempt.
Any planning must be flexible and benefit people either way. Ideally, the solution will allow clients to hold wealth outside the UK legally and tax-efficiently, while enabling them to invest in foreign assets. Equally, if they relocate, their new home country should recognise the solution.