Generali Worldwide

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International Investment Bonds

Tax Sales Aid – UK

Top 10 reasons for using an International Investment Bond (IIB)

DECEMBER 2015

FOR PROFESSIONAL ADVISERS ONLY,NOT TO BE DISTRIBUTED TO CLIENTS This Tax Sales Aid is for general information only and must not be regarded as an offer or invitation to acquire an interest or participate in any International Investment Bond. Capitalised terms within this document have the meanings given to them in the definitions section of the (UK) Master Technical Guide.

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This Tax Sales Aid is for general information only and must not be regarded as an offer or invitation to acquire an interest or participate in any International Investment Bond.

Top 10 Reasons

1) Gross roll-up

2) 5% cumulative annual allowance

3) Switching investments- no UK CGT applicable

4) Multiple lives (only the last one to die triggers taxation)

5) Clustering (allows tax efficient withdrawals)

6) Planning with gift assignments

7) Time Apportionment Relief (TAR)

8) Top Slicing Relief (TSR)

9) Deficiency Relief (DR)

10) The use of trusts (Inheritance Tax planning)

TOP 10 REASONS FOR USING AN INTERNATIONAL INVESTMENT BOND (IIB):

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This Tax Sales Aid is for general information only and must not be regarded as an offer or invitation to acquire an interest or participate in any International Investment Bond.

1. GROSS ROLL-UP AND CHARGEABLE EVENTS

International Investment Bonds (IIBs) are non-income producing assets so income and gains of the underlying investments roll-up within the IIB. Investments in IIBs generally grow virtually free of tax throughout the time the product is held, subject only to a potential withholding tax deducted at source in certain jurisdictions.

No UK tax liability arises on a planholder with respect to income and gains arising within an IIB. Hence, UK planholders generally do not have to include an IIB in their annual self-assessment tax returns, until a chargeable event occurs (which is usually when the plan benefits become receivable in some fashion or when the value of the plan is realised other than on an accruals basis).

With regards to UK resident non-UK domiciled individuals who hold IIBs, remittance rules will not apply and UK Income Tax is only payable when a chargeable event occurs.

The only annual UK Income Tax potentially applicable to IIBs is the Personal Portfolio Bond (PPB) tax charge, which can be avoided if the PPB is limited to restricted assets according to the UK PPB regulations on the last day of the insurance year which started in the tax year in which the PPB planholder(s) became UK resident.

2. 5% CUMULATIVE ANNUAL ALLOWANCE

An individual is entitled to withdraw a sum equal to 5% of the original premium paid in each insurance year (up to a total of 20 years) from an IIB without incurring an immediate UK Income Tax charge. Each additional premium paid into an IIB is treated separately, and has its own 5% yearly allowance, beginning on the date of payment.

The allowance is cumulative, so any unused allowance in a tax year can be carried forward and may be drawn in a future tax year (e.g. the maximum an individual can use in the third insurance year is 15% of the original premium, i.e. 5% x 3 years = 15%).

Only where a withdrawal exceeds the permitted 5% cumulative allowance will there be an immediate charge to Income Tax. Any withdrawal exceeding this permitted 5% cumulative allowance (and thus having Income Tax applied to it) is referred to as an ‘excess gain’ and this should be taken into account in the chargeable gain calculation at the time of a further chargeable event (e.g. full surrender or death of relevant life assured), thereby reducing the final chargeable gain/ loss subject to UK Income Tax.

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This Tax Sales Aid is for general information only and must not be regarded as an offer or invitation to acquire an interest or participate in any International Investment Bond.

3. SWITCHING INVESTMENTS – NO UK CGT APPLICABLE

The underlying assets allocated to a plan remain the property of the life assurance company and not of the planholder. As a result, planholders retain many of the advantages of direct personal ownership of those assets. However, they do not have to pay UK Income Tax on dividends and interest income arising from the investments held under the plan nor CGT (potentially applicable where the insurer is established) on disposals when the investments underlying the plan are altered (assuming that all proceeds are retained within the plan). Also, fund switches made within an IIB do not trigger a personal liability to UK Income Tax or UK CGT and no annual tax reports are required.

4. MULTIPLE LIVES (ONLY THE LAST LIFE ASSURED TO DIE TRIGGERS TAXATION)

The death of the relevant life assured (i.e. the death by reference to which the death benefit is payable) under an IIB is a chargeable event if it gives rise to benefits being payable under a Plan. Thus, multiple lives assured can be used at the outset to avoid a chargeable event (this must be done at outset because the addition or removal of a life assured during the plan period is a chargeable event, although Generali Worldwide does not offer this facility). Note that the death of the relevant life assured (which triggers Plan payout) will create a chargeable event even if the planholder is still alive.

5. CLUSTERING (ALLOWS TAX EFFICIENT WITHDRAWALS)

The benefit of having a plan made up of a cluster of identical individual policies is that an individual can generally choose the method of withdrawal (i.e. they can surrender individual policies rather than taking a partial surrender of the plan) in order to reduce their UK tax liability.

The 5% Cumulative Annual Allowance should be available to partial surrenders across individual policies. If this allowance is not used every insurance year, it accumulates. This may be beneficial for withdrawals that occur after the allowance has been given a number of years to accumulate. A full surrender of an individual policy is taxed on the basis of the growth of the premiums paid into that individual policy and the tax calculation will include previous partial withdrawals and any tax paid on those withdrawals.

As a rule of thumb, a full surrender of individual policies is usually the best option when a large partial surrender is required during the early years of the plan and, in contrast, a partial surrender across all individual policies (plan) is usually the best option over a longer-term.

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This Tax Sales Aid is for general information only and must not be regarded as an offer or invitation to acquire an interest or participate in any International Investment Bond.

6. PLANNING WITH GIFT ASSIGNMENTS

Assignment (i.e. transfer of ownership to another party) of the beneficial interest in an IIB for money or money’s worth, unless it is a ‘disregarded assignment’ (i.e. an assignment between spouses/ civil partners living together, assignments as part of a divorce or dissolution approved by a court order, assignments by way of security for a debt or on discharge of a debt), constitutes a chargeable event, with any chargeable gain being assessed on the assignor. An assignment by way of gift is not a chargeable event and therefore not subject to UK Income Tax.

Assignments may be used by the planholder if the assignor is a higher rate taxpayer and, post assignment of a plan (or individual policy), the future tax in relation to it is charged at the rates applicable to the assignee who may be a basic rate taxpayer. Also, for example, in the case of assignments to a student or spouse without an income, any chargeable gain (e.g. on full surrender) may be less than their UK personal allowance and therefore free of Income Tax.

7. TIME APPORTIONMENT RELIEF (TAR)

For plans issued on or after 6 April 2013, TAR is a tax relief available to IIBs which allows a reduction of the amount liable for UK Income Tax on a chargeable gain considering the period the person liable to UK Income Tax on the chargeable event gains was not resident in the UK. For plans held before 6 April 2013, these rules generally apply if the planholder has been non-UK resident at any time during the life of the plan. Hence, delaying the purchase of an IIB, while abroad, may result in a smaller reduction of the chargeable gain on full/ partial surrender after subsequent return to the UK.

For plans issued before 6 April 2013, TAR does not apply where the bond has been held by non-UK resident trusts or by foreign institutions. This exclusion has been relaxed for plans issued on or after 6 April 2013.

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This Tax Sales Aid is for general information only and must not be regarded as an offer or invitation to acquire an interest or participate in any International Investment Bond.

8. TOP SLICING RELIEF (TSR)

TSR is based on the period of UK residency during the ‘material interest period’ of the plan. TSR can reduce the impact of a chargeable gain that happens to push the planholder into the higher or additional rate Income Tax band by applying a spreading mechanism, i.e. the effect of TSR is to reduce in some circumstances the rate of tax charged on the chargeable gain. TSR may be available to further reduce any tax charges even where TAR has been applied.

Note that TSR is not available to taxpayers already liable to tax at the higher or additional rate before the chargeable event gain is added to their income, corporations or trustees (although the individual assessed on the gain on a plan that has been vested in trustees may have a right of reimbursement) and is also not available on Personal Portfolio Bonds (PPB).

9. DEFICIENCY RELIEF (DR)

Where the result of a gain calculated on a final event (e.g. full surrender, or death of the relevant life assured) shows a negative figure or ‘deficiency’, a relief called Deficiency Relief (DR) may be available to an individual. This is not a relief for ‘investment losses’ (i.e. losses suffered due to underlying investment performances) but instead is a relief to ensure that previous chargeable gains assessed to UK Income Tax (excess gains) do not exceed the ultimate overall gain (if any) on the IIB.

DR allows an individual to offset the lesser of the deficiency or previous excess gains assessed to UK Income Tax against that individual’s income (considering the following order: earned income, savings income and dividend income) in the higher rate tax band (this means that relief is given at the difference between basic and higher rate). If the DR cannot be used in a given tax year, it cannot be carried forward or back to other tax years.

10. THE USE OF TRUSTS (INHERITANCE TAX (IHT) PLANNING)

Settling an IIB into trust may be beneficial for reducing IHT on the settlor’s death. Assuming the initial value of the IIB is within the settlor’s available Nil Rate Band (£325,000 for the tax year 2015/16), there will be no IHT entry charge on settling the IIB in the trust. These are the rules that apply to a UK domiciled (or deemed domiciled) settlor on funding a trust.

Assuming that neither the UK domiciled settlor nor his spouse can benefit from the trust, the assets held in the trust may not form part of the settlor’s estate and therefore should not be subject to IHT on his death. If the trust assets are outside of the settlor’s estate, the trustees will have access to the proceeds without having to wait for a grant of probate.

There are also UK IHT planning opportunities for a non-UK domiciliary using a trust, e.g. on a move to the UK.

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Registered Head Office address: Generali Worldwide Insurance Company Limited, Generali House, Hirzel Street, St Peter Port, Guernsey, Channel Islands GY1 4PA.

Incorporated in Guernsey under Company Registration No. 27151.

T +44 (0) 1481 714 108 F +44 (0) 1481 712 424

enquiries@generali-worldwide.com

generali-worldwide.com

Regulated in Guernsey as a licensed Insurer by the Guernsey Financial Services Commission under the Insurance Business (Bailiwick of Guernsey) Law, 2002 (as amended).

Generali Worldwide Insurance Company Limited is part of the Generali Group, listed in the Italian Insurance Group Register under number 026.

Websites may make reference to products that are not authorised or regulated and/or are not available for offering to planholders in certain jurisdictions.

This Tax Sales Aid is for general information only and must not be regarded as an offer or invitation to acquire an interest or participate in any International Investment Bond.

The information contained in this document is based on Generali Worldwide’s understanding of UK law and Her Majesty’s Revenue and Customs (HMRC) practice as at December 2015, which may change in the future, and no other jurisdiction. The information in the case studies is for illustrative purposes only and should not be relied upon for decisions relating to individual circumstances. Independent tax advice should always be sought by clients as regards the tax laws of their jurisdiction(s) of residence and/or domicile before investing in an International Investment Bond. Every care has been taken to ensure the accuracy of the information contained in this document, but Generali Worldwide can accept no responsibility for any actions taken or decisions made as a result of this document. This document contains general comment/ information only and does not give advice on any particular matter or individual circumstances. This document is not intended for Hong Kong and Singapore residents.

When compared with other investment vehicles, IIBs benefit from a UK Income Tax (chargeable events and tax reliefs available), CGT (generally, no CGT will apply) and IHT (IIBs can also be held in trust for IHT planning) perspective.