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Among the changes announced in the Chancellor’s Autumn Statement was arguably the most significant amendment of the remittance basis charge (RBC) since its introduction in 2008. Resident non-domiciled (RND) taxpayers who have spent 12 of the last 14 years in the UK will, from April, need to pay a RBC of £60,000 (up from £50,000) for the privilege and a new charge of £90,000 will be imposed on those resident for 17 of the last 20 years. Coupled with the loss of personal allowances, the cost of the remittance basis of taxation is rising rapidly and with the legislative framework for the RBC firmly in place, there is little to stop future increases in the charge.

As we approach the end of the tax year, some RNDs will be contemplating paying the RBC for the first time, other longer term residents will be about to step up to the new £60,000 or £90,000 charge. Many will be looking for alternatives to paying the charge and will need to review their existing planning and holding structures.

For RND clients, a Lombard International Assurance compliant life policy continues to be a valuable means of avoiding the need to elect the remittance basis or pay the associated charges. Income and gains within the policy arise to the insurer rather than to the policyholder and tax is deferred until sums, in excess of 5% p.a. of the premium, are withdrawn or the policy comes to an end.

UK Pre-immigration planning

Life assurance policies are widely used in Europe for wealth planning, as they can offer significant advantages over direct investments.  They can also offer significant planning opportunities for the policyholder contemplating a move to the UK. But will all policies remain tax efficient after the move?

Highly Personal Bonds

The tax advantages referred to above depend on the policy not being treated as a personal portfolio bond (PPB) in the UK, for example as a result of the policyholder being granted influence over non-permitted underlying investments. Any policy where some or all of the benefits are determined by reference to an index or property of any description, and which allows the policyholder or a person connected with the policyholder to select property or an index that is not permitted by the legislation, will be a PPB and the policyholder will be taxed at his highest rate of income tax on a deemed 15% gain every year. It is not sufficient for the policy to invest only in compliant assets if its terms and conditions allow non-permitted assets.

For the European policyholder moving to the UK with a non-PPB compliant policy, this may mean a large potential income tax bill even if the policy assets decline in value and regardless of any withdrawals from the policy.

Consider the policyholder who invested €5m in a policy that is not efficient under the PPB rules and who moved to the UK.
 
Year Premiums paid, years 1 to end year y (A)  Cumulative amount of PPB excesses for years 1 to (y – 1) (B)  PPB gain for year y = 15%( A + B ) Potential Tax liability at 45%
1 5,000,000 Nil 750,000 337,500
2 5,000,000 750,000 862,500 388,125
3 5,000,000 1,612,500 991,875 446,344
4 5,000,000 2,604,375 1,140,656 513,295

         
 At the end of the fourth policy year he is liable to income tax on a deemed gain of €1,140,656.

The UK resident non domiciled policyholder should be aware that life assurance policies are not subject to the remittance basis of tax. This means that even if the policyholder is a remittance basis user, he will be taxed on any withdrawal in excess of his cumulative 5% and, if the policy is a PPB, on any deemed gain even if no withdrawals or actual gain are made.

The problems of deemed gains can be easily navigated by choosing a Lombard International Assurance policy, which is able to invest in a wide range of assets including collective investments, investment trusts and internal linked funds. Existing Lombard International Assurance policyholders moving to the UK need not surrender their policies. Provided sufficient advance notice is given, their policies can be adapted for UK tax-efficiency. Investors moving to the UK with third party policies should consult their insurance provider before moving.

Segmented Policies

European life policies are normally written as one policy, as it is usual practice to treat each withdrawal as comprising capital and growth and to tax accordingly. In the UK, the tax regime is more complex. The chargeable event regime allows withdrawals of up to 5% each policy year of the amount invested without any immediate liability to tax but with any surplus subject to income tax at the policyholders’ highest rate. Issuing a life policy as a cluster of smaller policies allows tax to be minimised by the policyholder by taking a combination of withdrawals up to 5% and individual policy surrenders thereafter. Policyholders of third party providers who come to the UK may not be able to benefit as their existing policies may not be segmented.

Time Apportionment Relief

 Time apportionment relief reduces any chargeable gain taxable in the UK to a fraction determined by days spent in the UK divided by the total period on ownership of the policy. Surrendering an inefficient policy soon after relocation to the UK will trigger only a minimal tax liability but generate considerable opportunities for tax planning going forward by reinvesting in a new, segmented, compliant UK policy. For example, a policyholder coming to the UK with a policy taken out 10 years ago would only be liable to tax on around 1/3651 of the gain if he surrendered the policy on his first day in the UK.

Top Slicing Relief

 Top slicing relief is available to reduce tax that may be payable on the surrender of a life policy, should the chargeable gain when added to any existing taxable income cause the policyholder to become a higher rate taxpayer. It is particularly attractive for UK resident policyholders who can control their income (dividends and/or flexible pension payments post April 2015, for example) or who can assign their policy to non-tax paying spouses or children.

Consider a UK resident who invested £5,000,000 in a life policy for himself and his wife. Twenty years later, the policy is now valued at £10,000,000 and they decide to surrender 20 of the 100 policy segments. They each have other UK income of £10,000.
 
Original investment (20 segments) £ 1,000,000
Withdrawals     £ Nil
Segment value year 20   £ 2,000,000
Chargeable event gain £ 1,000,000
Gain per policyholder  £ 500,000

Under current legislation, top slicing relief divides the gain by the number of whole policy years (20) to obtain the ‘slice’, £25,000 in this example. This is added to any existing income and the income tax due on the ‘slice’ is calculated and multiplied by the number of years to obtain the total tax due on the policy surrender.

Should the tax due on the slice fall into the basic rate band, the whole gain, no matter how large, will be taxable at the basic rate. In this example, the slice of £25,000 will be taxable at 20% as will the whole gain of £1,000,000. By being able to control their income (for example, by controlling dividends and pension payments), and by making use of top-slicing, the taxpayers in this example have been able to save up to £125,000 each in tax.

Similar planning may be used in later years with the remaining segments.

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