By Attila Kadiköy, Founder & Managing Partner at Levantine & Co. (Pty) Limited
How a Tax Rule Change Shifts the Conversation
For many internationally mobile families, the UK has historically been a land of opportunity, stability and global connection. But recent changes to the UK tax regime have dramatically altered how internationally wealthy people must consider the ownership, location, and long-term management of their assets.
The abolition of the remittance basis has significantly changed the planning landscape. Those leaving the four-year Foreign Income and Gains regime may be liable to UK tax on their worldwide income and gains. Wealth planning is moving away from simply asking where assets are held to how the assets are structured.
This distinction is important for high-net-worth families. Two people can have the same investment portfolio but face totally different tax consequences, depending on the legal and investment structures in which those assets are held.
The wrapper around wealth may be as important as the wealth itself. One increasingly discussed solution is single-premium bonds, particularly offshore ones, for those not considered long-term UK residents. The investments themselves may be familiar (equities, fixed income, cash or alternative assets). But the wrapper in which they are held can have a material effect on the timing and manner in which tax arises.
A single premium bond is an investment-linked insurance structure in which an individual makes a one-off investment, and the underlying assets are held within the bond. The primary benefit is that any income and gains arising in an offshore bond can generally accumulate without immediate liability to UK income or capital gains tax for investors, allowing growth to be deferred until a subsequent chargeable event.
The strategic significance of time.
That ability to time taxation can be especially valuable. High net worth families generally lead complex financial lives, with changing income levels, tax residence and family situations. Knowing when and how a taxable event happens might allow for more thoughtful planning.
Under the UK chargeable event rules, there may be a tax charge on events including the full surrender of the policy, withdrawals above permitted allowances, maturity of the policy, or certain assignments for consideration. The profits from this are taxed as income, not capital gains, so you need to plan for withdrawals and the eventual surrender.
The single premium bond’s value exceeds the tax deferral. It can also provide flexibility in how and when capital is accessed, with policyholders able to make cumulative withdrawals of up to 5% of the original premium annually, with no immediate chargeable event. However, care must be taken as exceeding the available allowance on withdrawals may result in taxation.
Planning for more than one generation.
One of the most attractive features of single premium bonds is perhaps their possible role in inter-generational planning. In certain situations, a bond can be gifted without an immediate tax charge. This allows families to pass the policy to the next generation or to a family member who may be taxed at a lower rate when a chargeable event occurs in the future.
This points to a major change in wealth management today. More and more successful families are realising that investment performance is only one piece of the wealth-preservation jigsaw. It’s also important who owns those investments, the jurisdiction in which they are held and the implications for succession and timing of future tax events.
The Future of Wealth: Not Simplification but Smart Coordination
This is particularly true in a world where families often live in more than one jurisdiction, where children are educated overseas, where business interests are international, and where future generations are likely to be tax-resident in a different country to their parents. The challenge is not amassing wealth but flexing that wealth to meet the needs of the family.
The families that are best at holding on to their wealth are not necessarily those with the most elaborate structures, but those whose arrangements are clear in purpose and understand that circumstances will change. One part of that wider approach could be a single premium bond, for the planning opportunities and flexibility that suit the family’s long-term goals.
The most sophisticated structured families will not necessarily be best positioned to thrive in the UK’s new tax era. These will be people who have taken the time to structure their wealth in a thoughtful way, with investment decisions, tax considerations, and family objectives all dovetailing as part of a coherent long-term strategy.