Non-domiciled UK clients may see their estate hit with an unexpected tax bill on death following a change of stance by HM Revenue & Customs.
Until now, non-domiciled UK clients could take out a UK whole of life insurance policy and arrange it so that the plan was held outside the UK, or “under seal”.
As the plan was held outside the UK, clients could save up to 40 per cent on inheritance tax on the value of the life policy, providing they were not living in the UK when they died.
But a change of stance by HMRC means policies set up under seal may no longer be exempt from IHT. HMRC now requires greater tests to be carried out to establish what be classed a non-UK-situated asset, including where the insurer is based, where the policyholder is living when they die, and the location of any property where the policy is being used as security.
Skandia says existing clients who have moved their insurance policy overseas will now need advice to reconsider how best to protect their estate from paying inheritance, such as setting up the policy in trust.
Skandia head of wealth planning Colin Jelley says: “Using trusts is an excellent way for advisers to demonstrate the value of their advice to clients, and the potential savings from such wealth planning really can be significant.”
Technical Connection joint managing director Tony Wickenden says: “Non-doms could consider the policy subject to trust but they would always need to think about dual liabilities regarding state taxes in another domicile.
“There could be a way out but if HMRC is definitely unhappy it could cover that aspect too.”