Also available in PDF.

Many investors have recently suffered losses in the investment markets, and portfolio gains built-up over a number of years may have fallen. Investors find themselves at a crossroads - trying to remain agile and adapt to volatile investment markets, while wondering how the future will look.

As challenging as it may be, this recent market correction also provides an opportunity for investment advisers to recommend that their clients consider the merits of tax-deferment structures.

For your UK investor clients, whether they are non-domiciled (RND) or Deemed Domiciled investors, the prospect of capturing future investment gains in a gross roll-up vehicle may be too good to miss. The same is true for UK resident and domiciled investors.

Unveiling a huge rescue package for Britain’s army of selfemployed workers on 25th March, Chancellor Sunak said he had set aside economic orthodoxy to deal with the national emergency, but warned that would come at a cost as public finances are plunged deep into the red. Mr Sunak issued a direct warning that the price of the package would include the future loss of tax and national insurance perks.

With the overall cost of economic support now running to hundreds of millions of pounds, and tax revenues collapsing, the Chancellor hinted at wider tax hikes in future, saying that everybody would be ‘chipping in’.

RND and Deemed Domiciled investors are just as likely to be affected by future tax hikes as other groups in the UK population.

Questions may be raised in respect of the preferential tax regime for both RND and Deemed Domiciled persons, and/or the 15 out of 20 years test for Deemed Domiciled status, for all tax purposes. The Treasury will face some difficult choices between attracting/keeping wealthy non-doms, and sharing the increased tax burden in an equitable way

EU portable and investment based life insurance structures (EU Life Policies) offer long-term tax deferral, with gains taxed on the arising basis.

They can be particularly effective where investment markets are thought to offer good value, and are likely to be considered by individual investors and entities such as offshore trusts. Some comfort may be taken from the fact that policyholder tax rules, including the annual 5% tax deferred withdrawal facility, were reviewed as recently as 2017.

There are likely to be some immediate investment opportunities via EU Life Policies for UK resident, foreign nationals.

1

 

Deemed Domiciled investors with pots of Clean Capital may have been paying Income Tax on income arising

The recent fall in investment markets could reduce or eliminate capital gains, providing investors with another chance to move funds into EU Life Policies. Subsequent gains within such policies will also comprise Clean Capital. Any policy can be offered as security for a loan if the investor requires access to funds in excess of the cumulative 5% tax deferred withdrawal allowance. There are no remittance issues if the funds are used in the UK.

2

 

Protected Trusts

Protected Trusts (established by RND’s prior to acquiring deemed domicile) protect Deemed Domiciled persons from tax in respect of trust income and gains provided the trusts are not tainted, for example by additions. As a result of what may have been a drafting error, offshore income gains (OIG’s) arising on the disposal of non-reporting funds seem to be excluded from the definition of protected foreign source income, unless the settlor is a remittance basis user. Settlors who have become Deemed Domiciled will be subject to income tax on the arising basis in respect of OIG’s realised within a protected settlement.

Trustees of protected settlements can dispose of interests in non-reporting funds and move the proceeds into EU Life Policies used as holding vehicles for future purchases and redemptions of similar funds. This planning is unlikely to take place if OIG’s arise on disposal. The issue may have subsided through the market correction, providing a window of opportunity for trustees keen to protect future gains from Income Tax within a European Life Policy

3

 

The Protected Trust tainting rules do not apply to EU Life Policies

The Protected Trust tainting rules do not apply to EU Life Policies, as tax deferral is provided by life policy tax rules in respect of future investment gains. Tainting is therefore less of a concern if funds are added to a Protected Trust where an EU Life Policy is the only, or one of few investments

4

 

A similar issue exists in relation to the accrued income scheme

Where a security such as a bond is sold with accrued interest, the element of sale proceeds representing accrued interest is deemed to be income for tax purposes. Again, such deemed income is likely to be unprotected if the asset is redeemed before maturity, or before an interest payment date. The problem can be avoided if the holding vehicle is a properly structured European Life Policy, and now may be the time to consider such planning.

5

 

For life policy investments, the annual 5% tax deferred withdrawal allowance is fixed

For life policy investments, the annual 5% tax deferred withdrawal allowange ("the allowance") is fixed according to size of premium payment. Any fall in the value of an underlying portfolio because of volatile investment markets will not affect the allowance, assuming there is sufficient policy value to cover payment.

6

 

Investing today may increase the value of future planning options

For example, the future gift of a policy, or policy segments, is not a taxable event. Contrast a future gift of directly held securities which could crystallise a taxable gain.