PPLI Definition: A Life Assurance contract where the variable value of the contract is linked to one or many investment accounts, typically segregated accounts managed by a 3rd party to a strategy agreed between the insurer and policyholder.
Most private client practitioners operating in Central Europe are fully aware of how PPLI can provide country specific solutions for clients. They will also know that PPLI may be employed for clients and families whose affairs cross borders on mainland Europe. Interestingly, some of the daily planning assumptions made safely within Civil Law jurisdictions might not be applicable in Common Law states. These differences are important when advising European clients living in the UK as resident non-domiciles (UK RNDs).
Many European practitioners will have High Net Worth (“HNW”) clients resident in, or with family members connected to, the UK (the largest Common Law state in Western Europe). Many of these UK RNDs will have an expectation that they may leave the UK or need to consider estate planning for family members living outside of the UK. These clients need structuring vehicles that can operate under both Common and Civil Law codes.
Fortunately such a vehicle exists. Life assurance is recognised in almost all Common and Civil Law states. Yet, how a PPLI might be structured and how it should be written, to maximise the desired planning outcomes, differs significantly between the UK and most other EU states. The major area of difference and interest is estate planning. In that regard some important characteristics need to be identified at outset.
In Britain offshore insurance bonds are typically written without a beneficiary clause. UK insurance law does not automatically accept an insurable interest between family members unless a financial interest can be demonstrated. Without an insurable interest a policy will be invalid. The use of a beneficiary clause is further diminished for those that are, or may become, liable to UK estate taxes. Appointing a beneficiary serves no purpose towards mitigating UK inheritance tax. UK estate duty falls, as a liability, on the estate of the deceased. European estate planners may be more familiar with the taxable entity being the estate beneficiaries, in receipt. For an individual exposed to UK Inheritance Tax the value of the policy (or their interest in the policy), immediately before their death is added to all other assets when calculating the taxable estate.
To manage this situation gifts during life are an integral part of UK estate planning; the ambition being to reduce the taxable estate of the deceased. Life policies offer a practical gifting tool as the gift (without monetary compensation) creates no income tax charge, no immediate charge to inheritance tax and a policy written on many lives (see below) offers planning longevity to the next generation. Whilst there is no immediate charge to UK inheritance tax the gift holds a potential liability. Should the assignor die within 7 years of making the gift a charge will arise (size dependent upon the period between the gift and the death). However, after 7 years the liability falls away to zero.
UK inheritance tax planning for UK RNDs has traditionally involved trusts. In fact to establish ‘excluded property’, which can include life policies either inside or outside of a trust, under an appropriate settlement is an extremely effective defence. However, whilst the trust (typically established in one of the UK’s Crown Dependencies outside of the EEA) can be wholly effective for UK purposes its presence can become highly problematic when assessed against other fiscal codes. Consider how a trust might work for a settlor that has returned to mainland Europe or one who remains in the UK but whose heirs may receive trust distributions in Europe? The trust does not provide a cross-border solution in most cases.
The differences in best practice, for insurance bonds, between the UK and Europe extend further. A Wealth Manager in London advising a UK national client will commonly suggest that a PPLI contract is written on many lives; the lives of parents, of children and of even grandchildren. The use of multiple lives ensures that the policy may pass to the next generation by way of gift (as a long-term tax deferral vehicle) or inheritance (without income tax on retained policy gains). Selecting the appropriate number of lives assured for a UK RND is a critical task and will be dependent on individual circumstances.
(Interestingly, the use of ‘multiple-life’ policies is common despite the underlying UK legislation on insurable interest; as mentioned above. In fact, the Isle of Man (for its significant life insurance industry), whose legislation mirrored that of the UK, amended its legislation to solve this problem over 10 years ago.)
Returning to the original premise of this article; if we consider the needs of UK RNDs we must assess more than just UK planning concerns. If a UK RND plans to leave the UK or has family outside of the UK some consideration of estate planning beyond the UK is vital (and will support the continuation of adviser mandates).
Fortunately, insurance bonds are available which include the necessary functionality to meet the needs of UK RNDs no matter what their plans. Effective estate planning via the ‘European’ model for life assurance is available to all UK RNDs via specialist insurance contracts. Should the client wish to remain in the UK then become ‘deemed-domicile’ and endure an exposure to UK estate tax, the policy may be operated in a more traditional ‘UK’ style. To secure the potential available for UK RNDs practitioners should consider avoiding policies written on UK Law. The UK Financial Service and Markets Act offers complete freedom on the Choice of Law for a contract of assurance. Importantly, contracts written on a law other than that of the UK still retain full fiscal efficacy in the UK. Practitioners advising UK RNDs should consider policies that can be written on a civil law; either the Law of the issuing state (such as Luxembourg) or the Law of the client’s European nationality.
To confirm; a policy issued in Luxembourg, written on Luxembourg Law or some other European Law can be fully effective for income and capital gains tax purposes in the UK. It can also retain all of the necessary functionality to offer your client a flexible estate planning tool for the UK and most other European states. A contract issued in Luxembourg and written on UK Law will be fully effective for UK taxes but will suffer limitations as a cross-border tool.
Finally, remember that the novation of a policy is not possible in normal circumstances. If a policy is to provide the client with a solution across-borders it must contain the required contractual elements from outset. Avoid giving a fiscal authority the chance to challenge the history of a contract by having a policy adapted, at a later date, by way of endorsement. Ensure your policy is fit for purpose from outset. Bâloise Vie Luxembourg S.A. has the expertise and resource to work with you towards this aim.
Properly constructed PPLI contracts can deliver dynamic and universal solutions for UK RNDs. By careful analysis of a client’s needs and plans robust and adaptable structures can be built. Then again clients always change their minds and sometimes the client may need to second guess themselves. Good luck.
Bâloise Vie Luxembourg S.A. International and its multilingual team of experts are at your disposal should you require any further information regarding the content of this article or any other subject.
Philip Tarplee is a Director of IIII Ltd.
IIII Ltd is regulated by the UK FCA