Founder & CEO of Altvest Capital Partners
Director (Wealth Management) at Swiss-Asia Financial Services
Estate
Planning
Estate planning is the process of preparing for the transfer and ongoing management of assets and property in the event of disability or death. Most of the time, people overlook the need for estate planning as it tackles a sensitive topic. Effective estate planning is a holistic solution often encompassing several interlinked or entirely independent solutions.
There are numerous considerations to ensure effective estate planning, below are some of the more common circumstances and the proven methods of dealing with them.
In order for a business to continue functioning, there should be a back-up plan to protect the interest of a key employee within the company. One of the solutions is to have a ‘Key Person Insurance Policy’ in place. In the event of a key employee’s untimely death, the insurance plan provides the company with additional financial support to cover any losses.
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The payment options are flexible, so the premiums can be paid in the form of cash or the transfer of assets. This will not disrupt the cash flow within the company. If the key person whose life is insured leaves the company, there is an option to have a replacement so as to keep the policy in force without having to start a new policy.
Business
Continuation
Estate Equalisation
Most of the time, business owners and entrepreneurs find that a high percentage of their assets are bound to their business. This potentially poses a challenge with estate planning, considering how to distribute the assets between children, without interrupting the operations of the business.
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A business owner who has more than one child can purchase an appropriate Life Insurance policy where one of the children is life assured and any other children can be named as beneficiaries.
Just like a Key Person Insurance Policy, the policy can accept cash, transference of assets and even shares as the premium. In this case, there will not be a need for the liquidation of assets and upon death, in line with prior arrangements, the company’s share will be paid out to the respective children who were initially nominated.
There are several tax benefits for certain life insurance solutions which apply specifically to people who are looking to move to the UK permanently or British Citizens returning to the UK.
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Gross Roll Up
Qualifying policies are not liable for taxes on income, capital gains on assets held within the policy, any tax is effectively deferred until funds are withdrawn from the policy.
UK Tax
Efficiency
Tax-efficient Withdrawals
For 20 years, withdrawals of up to 5% of the initial premium and any additional premiums can be withdrawn with no immediate UK income tax charge. Any unused allowance can roll forwards.
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Gift Assignment
Certain life policies can be gifted to a third party by assigning ownership to that person. At the point of assignment, there will not be any tax charge on the UK income or capital gains. Any future tax liability transfers to the new owner.
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Time Apportionment Relief
Upon returning to the UK, any chargeable gains that are subject to UK income tax will be minimized according to the length of time the policy holder was abroad. Any additional investment to the policy whilst resident or non-resident will be considered as additional investment made at the start of establishing the policy, thus reducing the taxable amount.
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Top Slicing Tax Relief
When a qualifying life policy is liquidated, the returns on the investment may result in higher or additional taxes. Top slicing relief alleviates the rate of tax imposed by spreading the returns over the policy years from the time that the policyholder became a UK resident.
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Trusts
Trusts provide asset protection, eliminate the need for probate, help with generation planning and reduce or even remove UK inheritance tax.
China
Specific
There are specific benefits for China tax residents who possess investment-linked life insurance policies.
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Succession Planning
Beneficiary nominations can receive death benefits without delays with probate.
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Tax-efficient Withdrawals
Partial withdrawals and surrenders are not up for evaluation by PRC IIT (Peoples Republic of China Individual Income Tax).
Wealth Preservation
In order to preserve the wealth for the generations to come, death benefits are not assessable by PRC IIT.
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Reduced Report Administration
A policyholder with consolidated assets will have fewer institutional reporting requirements under the Common Reporting Standards regime.
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Privacy
Asset and beneficiary information are kept under strict confidentiality.
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Gift Assignment
The policyholder does not need to pay PRC IIT when the policy is assigned as a lifetime gift with no consideration.
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Gross Roll Up
Income and growth are not assessable for PRC IIT, enabling investments to flourish virtually tax free.
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Liquidity Through Life Insurance
The sum assured paid out upon death provides instant liquidity.
Tax deferral refers to consolidating investments within a tax-efficient structure in order to delay the liability for tax until a future date. This is helpful for individually held investments with returns that are typically subjected to instant taxation and/or Capital Gains Tax (CGT).
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By using an appropriate life insurance policy, the investments are left to grow virtually tax free. Compounding and tax deferral are two of the most effective methods for the accumulation and preservation of wealth.
Tax
Deferral
Under general inheritance law, when one passes on, assets and property will be passed down to the family members. However, if one decides to leave the assets to someone outside the family, a written will is required. The details of which will be disclosed to all family members.
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As the global standard of living increases, the need to provide for the family to ensure that generations to come have the means to survive is becoming ever more pressing. Most parents are concerned about rising education costs for their children and grandchildren.
Family
Protection
However, with a suitable Life Insurance Policy, the policyholder can name any beneficiary outwith the family circle. The identity of the beneficiary is kept strictly confidential, which allows the policyholder to bestow financial security to the chosen beneficiary without disclosing to anyone who may have a conflict of interest or could dispute the decision.
​As a solution to this dilemma, parents can consider establishing a suitable Life Insurance policy. For further peace of mind, they can incept the policy on a ‘joint-life first death’ basis to protect against the premature death of a spouse, ensuring that the other spouse receives the death benefits and in turn protects the family’s standard of living even in the event of the remaining spouse needing to stay at home when their young children need them most.
Establishing investments in various countries where one is either domiciled or resident can result in unintended repercussions. These investments are known as ‘situs assets’ and can be a potential liability to estate and inheritance taxes where the investments are held.
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In order to avoid the tax situation with situs assets in the UK or US, it is advisable to transfer the shares to a suitable life insurance policy to lessen or remove any liability to UK inheritance tax or US estate tax for non-UK domiciles and non-US residents.
UK & US
Estate Planning
Australian
Estate Planning
In Australia, certain life insurance policies benefit from heightened tax efficiency. Owners of these qualifying policies are taxed on the ‘bonus’ obtained from their life insurance policy. A ‘bonus’ refers to the additional income or returns that owner receives from a qualifying investment-linked life policy.
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Essentially whilst there would be no tax benefit for the first 8 years, in year 9 only 2/3rds of any bonuses would be assessable for tax, in year 9 this reduces to 1/3rd and from year 10 onwards any bonuses (effectively gains) would not be subject to any income or capital gains tax.