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Tony Wickenden: Clarity on life assurance policies for non-doms

Tony WickendenLong-awaited guidance clears up confusion around the IHT position of policies issued under seal

Life assurance protection is an often overlooked estate planning tool. For UK-domiciled individuals, effecting a policy subject to a trust can deliver a neat, effective way of sorting inheritance tax liability that cannot be diminished through other planning. It can also be an interesting way to create or enhance an inheritance through the payment of an IHT-free sum assured.

And given the current environment set against aggressive tax planning, you could not get more passive or inoffensive. The taxable estate of the payer of the premiums would be reduced by the premium payments but they would almost always be exempt as normal expenditure out of income or under the annual exemption.

Other than that, the donor’s estate is not reduced as a result of the policy and there will be a ready IHT-free amount of cash to meet the liability. So, good for HM Revenue & Customs’ cash flow. What is not to like?

Specialty debt
Now, those not UK-domiciled or not deemed UK-domiciled will only be potentially liable to IHT on their UK-situs assets. For this purpose, when any UK residential property is held through a trust or other structure (e.g. a company) the outer structure will be ignored and ownership attributed to the non-domiciliary, much like under the annual tax on enveloped dwellings rules except with no minimum property value threshold.

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So what if a non-domiciliary has a life assurance policy effected with a UK insurer? Well, if it is held in an appropriate trust it should be outside of their taxable estate, as it would be for a UK domiciliary.

But there has been another way the policy could be ignored for IHT and that is to have it issued under seal. The understood rule in such cases is that the policy would be treated as a “specialty debt” and as sited where the policy document was physically located at the time of death. So, if this was outside the UK, it would be IHT-free.

There have been developments on specialty debts. A specialty debt is a debt, contract or obligation that:

  • Is executed as a deed;
  • Is incurred under statute;
  • Is a debt of the Crown.

It is a long-established principle of common law that the situs of a specialty debt (i.e. its location for legal purposes) is the place in which the document recording is physically situated.

By ensuring the deed recording a specialty debt is physically stored outside the UK, it has therefore been possible to ensure the debt itself will be treated as excluded property and so fall outside the scope of the charge to UK IHT for non-domiciled and non-deemed domiciled individuals.

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In relation to life assurance policies taken out by UK resident non-domiciliaries, if they are executed by way of deed or under seal and held offshore, their proceeds should not be subject to IHT (for as long as they also remain non-UK domiciled or deemed domiciled for IHT purposes).

About turn
HMRC’s approach to specialty debts had followed the accepted common law position. However, in 2013, it abruptly changed its stance and revised its guidance to state that “many such debts are likely to be located where the debtor resides or where property taken as security for the debts is situated”.

It advised insurers the position would be aligned to the understood view up to 2013 in relation to life policies written under seal unless the arrangement is “artificial”. But despite this “reassurance”, UK insurers and UK resident non-domiciled individuals were left in a position that was less than certain.

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An update has now finally emerged and the revised guidance (which can be found in the IHT Manual at IHTM27079, IHTM27080 and IHTM27104) confirms that:

  • Where the specialty debt is secured on land or other tangible property situated in the UK, the situs of the debt will also be in the UK;
  • Where the debt is not secured, the common law approach will generally be followed unless both the creditor and debtor are UK residents;
  • Life policies executed by way of deed or under seal will be treated as situated where the deed/policy is to be found, provided the policyholder is non-UK domiciled and there is no evidence to suggest the location of the documents has been artificially arranged. Lloyds policies will not be treated as specialty debts unless they also bear the witnessed personal signature of the general manager of Lloyds policy signing office. Lloyds policies that do not bear this signature are chargeable to IHT in the country where the debtor resides.

The publication of the long-awaited guidance will be welcomed by insurers and policyholders. Short of artificiality, IHT freedom should be secured. Of course, to be absolutely sure, a trust could be used. In either case, it is essential the non-domiciled individual takes advice on the impact of whatever strategy they adopt in the country in which they are domiciled.

Policies with an overseas insurer are not affected by this guidance and will always be excluded property in the hands of a non-UK domiciled investor.

Tony Wickenden is joint managing director of Technical Connection. You can find him by tweeting @tecconn

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