Tax Advisors

Tax Advisors

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  • Martin Katz
    Martin Katz
    The company name is only visible to registered members.
    Highly Personalised Bonds - time for a re-assessment ? (A UK Tax Article)
    Overall, Finance Act 2008 wasn’t a particularly pleasant experience for tax advisors and their clients. The wholesale changes to the remittance basis of taxation for UK non domiciliaries will take some time to adjust to and other changes such as the ‘clarification’ to the anti-avoidance legislation relating to the tax treatment of IIP trust / offshore limited partnership schemes such as those much used for UK resident and domiciled property developers has continued to erode interesting and profitable planning opportunities - and sadly in that case, with apparently retrospective effect.

    Certainly, the one thing that is unlikely to change is the continued need for private client advisors to be innovative and creative – arguably, more innovative and creative than ever.

    Single premium offshore bonds are well understood and commonly used to good effect as investment wrappers within clients wealth planning structures – however, the investments to which the value of the bonds are linked tend to be restricted to collective investment schemes thus preserving the bonds non Personal Portfolio Bond (PPB) status.

    However, in recent times, there has been increasing interest in the use of highly personalized insurance bonds whose value can be linked to other more exotic assets such as private company shares. The use of private company shares of course provides the ability to place almost any asset desired within a ‘bond wrap’ simply by putting it into the Company.

    It is well known that the Government introduced the Personal Portfolio Bond (Tax) Regulations 1999 in order to discourage use of such bonds but in practice, the legislation which deems a taxable 15% gain to the holder based solely on the extent of the premiums, whilst nasty at first sight is a fairly blunt instrument and is easily defeated by the careful use of loans.

    In practice, the use of PPBs has been fairly limited in the UK – although it has been more widespread in other countries, such as Sweden for example. There are several explanations for this. Firstly, and probably most importantly, it has been difficult to find an insurance carrier prepared to take personalized assets onto its balance sheet at a reasonable cost. Most insurance carriers are (understandably) very fond of their traditional asset based fee arrangement.

    Secondly, there hasn’t been a real need – UK ‘problems’ always seem to have an alternative, and better understood non insurance based solution – for example, - a company and trust structure for a non domiciliary or a IIP trust and partnership structure for a resident domiciliary.

    This has now changed – importantly, there is a growing selection of insurance carriers participating in this market place – and cost effectively. Our Company, Middleton Katz Financial Services Limited, specializes in advising on and arranging bespoke long term life insurance contracts for high net worth clients and we are aware of half a dozen insurance providers who will write PPBs.

    Recent changes in UK tax legislation require the exploration of such innovative and creative solutions by savvy tax advisors.

    Tax Treatment of PPBs in the UK.

    Other than the annual charge created by the anti-avoidance legislation referred to above, the taxation of a PPB is similar to that of any other offshore bond. In summary, all tax on income and gains within the bond is deferred indefinitely and any withdrawal or surrender is treated as income for UK tax purposes.

    The Willoughby case provides comfort that income accruing to the insurance company during the lifetime of the bond is outside the scope of the deeming provisions of s720 ITA 2007 (old s739 ICTA 1988). Leading Counsel (June 2008) recently confirmed to us unequivocally that they agree with this interpretation.

    Further certainty over the taxation is also found in the anti-avoidance legislation which prescriptively dictates the taxation regime applying to PPBs. The application of any other tax charge would seem to be specifically contrary to the intention of the legislation.

    Finally, it is pertinent to note that although income tax assets attract a potential 40% tax charge upon surrender in the hands of UK residents, this can potentially be mitigated entirely if the bond is surrendered while the bond holder enjoys a 1 full tax year sabbatical in a suitable territory. Alternatively the bond could be owned via an offshore company, the shares of which could be disposed of for cash thus resulting in an 18% charge.

    As an indefinite tax deferral tool, the scope for potential application of PPBs for both resident / domicilaries and non domicilaries by our creative and innovative private client tax advisors would seem to be broad.

    Conclusion.

    The changing wealth planning landscape demands much of private client advisors’ ingenuity.

    Historically personal portfolio bonds have been passed-over in favour of other strategies – as a result of both insurance cost and perceived need.

    Several insurance carriers now offer PPBs on a realistic fee basis and changes in the legislative landscape mean that ‘new’ solutions are required. As a result perhaps tax advisors will utilise PPBs in a more central role in wealth planning strategies, either alone or in conjunction with existing structures.
    • 08 Oct 2008, 10:20 am