Where the chargeable event is the death of the life insured, the taxable gain for UK purposes will be attributed to the ‘beneficial owner’ of the rights under the policy immediately before death, which is most likely to be the policyholder. It is therefore customary that the proceeds of UK investment policies are paid into the estate and the executor will be liable to pay the income tax charge.
By contrast, named beneficiaries under a typical European-style insurance bond acquire an absolute right so that, on the death of the life insured, the funds will only be released to them.
In a scenario where a UK resident policyholder dies with an offshore insurance bond identifying his Italian family as the beneficiaries, and a UK executor is appointed in relation to his estate under a UK form will, there is an obvious mismatch between the people entitled to receive the funds (the Italian beneficiaries), and the person potentially liable to pay the UK tax on the policy (the executor).
A way to minimise this issue is to have the policy beneficiary identified as the executor under the life insured’s will.
UK IHT issues
Finally, for UK IHT purposes, most foreign policies are treated as foreign assets on the basis that the debtor (i.e. the insurance company) is resident outside the UK. After 15 years of UK tax residence (with effect from 6 April 2017), a foreign domiciled individual will be treated as deemed domiciled and chargeable to UK IHT on a worldwide basis, with the result that the proceeds of a foreign policy could be chargeable to UK IHT (at 40%).
It is customary in European-style policies for the policyholder (often also the life insured) to be the only person who can exercise (rights such as surrender, assignment or pledge of the policy) during their lifetime. These rights will be treated as an ‘asset’ and potentially chargeable to UK IHT on the life insured’s death if he/she is UK domiciled or deemed domiciled.
The UK IHT liability should be borne by the persons in whose name the proceeds of the policy vests (i.e. the beneficiaries). However, the executor (if different) will be secondarily liable if tax is not paid within 12 months of death. This mismatch, once again, can create difficulties.
Conclusions
These are only some of the issues which we often come across in relation to continental-style offshore insurance bonds.
Depending on the circumstances, the policyholder might, on becoming UK tax resident, be advised to take out multiple lives policies so as to delay the chargeable event charge to the last of the lives-insured to die.
Alternatively, the policyholder might be advised to totally surrender the offshore insurance bond as soon as possible and start afresh with a new insurance bond offered by a non-UK based insurer, but tailored to the UK market.
