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Swedish and foreign life assurance have been well-known as tax-efficient wealth management tools for Swedish residents for many years. One of the main reasons for this popularity is that life assurance is not subject to Swedish income tax. Instead, it is subject to a standardised taxation method (yield tax).

The basis for the calculation of the yield tax on life policies is the value of the policy at the beginning of the year plus full value of premiums paid during the first six months of the year, and half value of premiums paid during the second half of the year. The applicable tax rate is calculated as the Swedish state borrowing rate as of 30 November of the previous year plus 0.75 (never lower than 1.25%) and this flat rate is then taxed at 30% yield tax. As a result, the current effective yield tax rate is an annual 0.42% for 2016.

The investment savings account, which was introduced in Sweden on 1 January 2012, is another wealth management tool subject to a standardised taxation model. As is the case for life assurance, tax is paid annually based on the Swedish state borrowing rate as of 30 November of the previous year plus 0.75 (never lower than 1.25%).

The calculation of the taxable base is made quarterly including payments and transfers made to the investment savings account, and the flat rate is taxed at 30% income tax. The effective rate is therefore also 0.42% for 2016. In addition, interest from cash held on the investment savings account is taxed at a regular 30% tax rate for capital income. This is only applicable if at any time during the year, the interest rate on the investment savings account exceeds the interest rate for the state borrowing rate as of 30 November the year prior to the income year.

The taxation models are similar for investment savings accounts and life assurance. Capital income and/or gains are not taxed on a continual basis, although capital losses also cannot be deducted. The annual yield tax/income tax makes both easy to report in a Swedish tax return. On closer inspection, there are important distinctions in the application of each solution.

Investment savings account 

An investment savings account can be a tax-efficient investment solution for an individual tax resident in Sweden. Since its introduction, it has become a popular way to invest in listed shares and other listed financial instruments.

This popularity is due both to the standardised taxation model and the added simplicity for the account holder in reporting the investment savings account, as compared to transactions in listed shares on a normal bank account. An investment savings account can also be closed at any time.

However, only listed shares and other financial instruments listed on a regulated stock market are eligible to be held on an investment savings account. Other assets, such as unquoted assets, corporate bonds, OTC-forward contracts or other financial instruments not listed on regulated stock markets, are considered incompatible with the account and, therefore, cannot be acquired.

Additionally, this specific investment vehicle is only recognized in Sweden and a Swedish individual moving abroad would not be able to benefit from the standardised taxation model in the new country of residence.

For clients wishing to access a broader universe of investments, or who may wish to spend time, or retire, abroad, life assurance can be an attractive alternative.

Life assurance 

Life assurance (of the non-pension variety) is considered very flexible because both individuals and companies can hold it.

A well-structured life policy offers clients  access to a wide range of assets including not only assets listed on a regulated stock market or regulated trading platform but also categories of unquoted asset (shares in closely held companies are excluded). The flexibility of this solution allows clients to choose more sophisticated investment strategies

In the cross-border context, the legal recognition of life assurance and the deferral of tax on growth in the underlying portfolio are well established. Consequently, a policyholder moving within Europe or further afield can often continue to benefit from tax efficient investments through life assurance in accordance with the rules of the new country of residence. These rules differ somewhat from country to country so it is important to make sure that the life assurance is compliant with the rules of the applicable countries before the move. Hence, it is advisable to use a carrier of expertise in all of the relevant countries and in the structuring of assurance solutions for compliance in multiple jurisdictions.

Many life assurance policies offer the option to appoint beneficiaries. By appointing beneficiaries, a life assurance can be used as a way of succession planning. For clients with complex lifestyles, life assurance can be an efficient and portable way to structure wealth while also providing an opportunity for succession planning and generational transfer.

Summary 

Life assurance and investment savings accounts share a common standardised method of taxation. However, there are some significant differences between the two and it is important to fully understand whether a chosen investment solution will meet a client’s objectives in the long term and be adaptable should circumstances change.

While the investment savings account is likely to be a suitable option for an individual with a non-complex situation interested in investing in listed shares or funds, if the wealth structure is more sophisticated and complex it would be advisable to consider using life assurance due to its investment flexibility and other potentially appealing features. 
 
Comparison of the two investment models
 
Benefit/feature Investment savings account Life assurance
For physical persons
For legal persons n/a
Tax Income tax 30%
of State borrowing rate +0.75%
AND
An eventual 30% income tax on interest from cash held on the investment savings account under certain circumstances.
 Yield tax 30% of
state borrowing rate +0.75%
Value  analysis  4 times per year +
payments during the year
per 1 January +
premiums paid during the year (whole or part of premiums paid)
Succession planninng n/a
Fixed time for assets n/a One year
Accepted investments Limitations Flexibility
Portability n/a


By Andrea Szymanski, Senior Wealth Planner


Please do not hesitate to contact your usual Lombard International Assurance representative if you have any queries or require further information.