This question becomes even more complex when the documentation is drafted in a foreign language, creating an additional risk of being ‘lost in translation’.
Under UK tax legislation, an investment policy wrapper, which qualifies as a life insurance policy, will achieve UK tax deferral. However, as soon as a chargeable event occurs (for instance, the death of the life insured, or maturity, total or part surrender, assignment of the bond) then the gain realised on the underlying assets is in principle chargeable to UK income tax (at a rate of up to 45%).
Would the offshore insurance bond qualify as a policy of life insurance?
Rather unhelpfully, the relevant UK legislation does not contain a statutory definition of what constitutes a ‘policy of life insurance’. However, it is likely that any policy that pays ‘benefits on death’ is potentially within the scope of the special rules for life insurance products.
Continental-style policies tend to offer life insurance cover well below the UK accepted standard of 1% (for instance 0.1% or even less) and sometimes provide no monetary death benefit uplift at all. Such offshore investment wrappers may still be considered as policies of life insurance if they include an element of uncertainty contingent on whether the rights under the contract arise on death or on surrender.
To be on the safe side, our advice whenever possible is to include a ‘death benefit uplift’ of 1%, as this will minimise the risk of the foreign policy failing to qualify as a policy of life insurance which might result in tax deferral being lost.
Issues with a beneficiary nomination
Another element that is often present in continental style policies (but not contemplated in UK investment policies) is a beneficiary nomination clause, which might give rise to pitfalls in the UK.
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