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UK Budget impact on Offshore Bonds

Each year HMRC look at closing down various tax planning schemes exploiting loopholes in legislation, where it is perceived that their existence facilitates a loss of tax to the UK Treasury.

More often than not, it is usually an elaborate scheme involving plant and machinery or something containing many layers of corporate structures to remove a profit or gain from tax.

Ordinarily, a return is filed giving details of the scheme and HMRC look at the ‘different’ interpretation of the law by the tax payer. Then, irrespective of whether they accept the return or take the matter to court, the law is usually changed such that it cannot be read in a way which differs from HMRC’s intention.

However, times are hard for UK plc at the moment, and rather than just concentrate on the big ticket revenue earners, they seem to be looking at anything which could potentially lead to a tax loss.

One particular area is the perceived exploitation of the chargeable event rules for insurers, and there are a number of products and loopholes marketed by insurers which have been impacted as a result.

Before I go any further, it’s worth pointing out that RL360 did not offer any of these products or promote the loopholes that were being exploited as we were never convinced that they would stand up to HMRC scrutiny.

The affected products were ‘cluster policy arrangements’. These schemes allowed full access to the majority of the policy segments, with all gains accruing to the last segment to be surrendered. If you looked at the actual legislation being ‘interpreted’ by companies offering such products, it was clear that you could do this. However, it really was a case of ensuring that each policy segment was truly individual and its transactions or benefits could not affect the other segments.

Where they were not truly individual and the transactions or benefits of one policy could affect those on another, HMRC really weren’t convinced that you could allow all of the policy gains to accrue to the last policy segment and, as a result, they have clarified the position and closed off the loophole.

Whilst the USP of such schemes was to remove the access barrier without breaching the ‘5% rule’, I have personally always had concerns for the person who would cash in or own the final policy segment, as they would suffer all the policy gains. Furthermore, as these schemes were used predominantly with trust arrangements, you had to question whether the beneficiary ‘having’ the last policy segment knew what they were letting themselves in for.

Another change was to limit the previous chargeable events on policies, to events where tax was actually paid and not where there was a ‘notional’ charge to tax. Whilst I understand that this was to counter an advanced tax planning scheme, it also counters a planning opportunity used by some offshore providers where a loophole in the highly personalised bond rules was exploited. The planning worked along the following lines:

  • The Personal Portfolio Bond (PPB) rules state that if the policyholder becomes UK resident and the policyholder continues to hold assets that would not be permitted under those rules, that there is a resultant charge to tax at the end of the first policy year following their taking up residence in the UK. This charge is 15% of the premiums paid and is cumulative, so that you eventually pay tax on tax. Where the policy is charged to tax, it is considered to be highly personalised from inception and you have a tax charge for each year that the policy has been in force irrespective of the policyholder being non-resident.

Now, all of this is on the basis that the client is UK resident when the charge to tax arises, and the tax paid will clearly be allowable in the chargeable event calculation to reduce any policy gain.

However, some insurers have been marketing ‘Deemed Gains’ tax planning to non- UK IFAs with non-UK residents for some time now, where it was intimated that even though no tax charge was being paid at the end of each policy year (as they were not UK resident), the ‘imaginary’ ongoing tax liability could be used in the final chargeable event calculation to offset any policy gain on encashment when the policyholder returned to the UK.

Both changes were made effective from 21 March 2012 and not the start of the new tax year as some have been commentating. However, you have to question whether any policyholder relying upon the deemed gains planning angle would be successful when arguing their case with HMRC for a policy that commenced before this date?

I would have thought that HMRC would challenge, as we have seen that they have been quite successful in recent years with the courts setting aside tax avoidance planning that has been achieved through viewing the letter of the law in a different way to what was intended when it was drafted.