In the consultation, Life Insurance – Time Apportioned Reductions, published today, HMRC has outlined a proposal to extend the time apportioned regime to UK onshore bond policies.
Under the regime, when a policyholder moves offshore the bond does not attract tax during the period of time they are outside the UK.
This “time apportioned reduction” is then deducted from the taxable amount at the point when the policy reaches a taxable event, for example at surrender.
In the proposal, HMRC states: “…It is not considered appropriate that reductions to gains for periods of residence outside the UK should be limited to policies issued by insurers outside the UK. It is therefore proposed to extend the rules…so that they apply to policies issued by UK insurers.”
The regime has long been seen as a staple attraction of using an offshore bond, but these new proposals would mean some policy holders may prefer to opt for an onshore policy, according to Gerry Brown, technical manager at Prudential, who said the proposal is another example of the UK government “chipping away” at the benefits of offshore structures.
“All offshore bond providers say that this is an advantage of using an offshore bond product over its UK counterpart,” said Brown.
“If this advantage is removed then, comparatively, onshore bonds stand to benefit.”
Conversely, Rachael Griffin, head of product law and financial planning at Skandia International, said many advantages of using an offshore bond remain and that the time apportioned regime is more the “icing on the cake” when it comes to making a decision over whether to use offshore or onshore bonds.
“When an adviser is discussing the various merits of using either an onshore or offshore structure, there will be many other factors which will come much higher in the conversation, such as the investment choice and of course rate of tax payable,” said Griffin.
“As always, the devil will be in the detail, but I do not see this as detrimental to the offshore bond industry but rather as a little bonus for onshore, the reasons for selecting one or the other remain.”
The consultation, which runs until 5 November, is also seeking to amend how the reduction is calculated. Current rules mean that the reduction is applied to the entire amount at the chargeable event, regardless of when top-up premiums were paid – even if they were paid in the UK.
In its proposals, HMRC said: “The effect of this approach is to give relief on an amount that may be greater than the proportion of the gains that accrued during the period of non-residence, and this effect is widely marketed as a tax advantage.”
Brown said removing this advantage of an offshore bond is again an example of the UK government’s intention to remove “perceived tax avoidance” but materially should not impact the industry.
The changes will also cause insurers an administrative headache, according to Neil Chadwick, technical manager at Royal London 360°, which he said may lead to greater policyholder confusion.
“Due to the increased number of ‘unusual circumstances ‘ insurers will be producing chargeable event certificates with incorrect information which will lead to increase policyholder complaints albeit that the insurer is not doing anything wrong,” said Chadwick.
“Policyholders and advisers will be expecting insurers to provide accurate information and as such, this looks like being an additional burden on the industry.”
