A surge in sales of so-called ‘insurance wrappers’
reflects big business opportunities for private banks, but experts
caution against using generic non tax-compliant offshore spin-offs.
Maryrose Fison finds a growing market for these unit-linked life
policies for high net worth individuals.
Go deeper with GlobalData
The rising popularity of insurance
wrappers among global insurance companies over the past six months
has revealed a growing market for tax-efficient unit-linked life
policies for high net worth individual. Using generic offshore
wrappers, however, could do more harm than good.
Insurance wrappers ‘wrap’ an
investment portfolio into an insurance contract with a written-in
guarantee to pay the value of underlying assets upon
encashment.
As governments across Europe hike
up taxes, the tax-deferring quality of insurance wrappers is
becoming more appealing to investors in the higher income tax
bracket.
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By GlobalDataWrappers: A vehicle for
avoiding taxes?
The term “wrapper” has gained a bad
reputation of late, with some seeing it as vehicle for avoiding
taxes. But insurance wrappers issued by regulated, tax-compliant
life companies are capable of reducing tax charges in a perfectly
legal way and enhance a private bank’s service proposition to
wealthy clients.
John Barnett is chairman for the UK
Chartered Institute of Taxation’s (CIOT’s) capital gains tax and
income investment committee. He says the favourable tax deferral
arrangement available through insurance wrappers was inscribed in a
series of regulations specifically designated for insurance
contracts known as the Income Tax Trading and Other Income Acts
2005 regulation (Part 4, Chapter 9).
Barnett adds that offshore insurance wrappers operating under
the EU Freedom of Services regime, and specially regulated in the
jurisdictions of their policyholders, could offer valuable
incentives for clients looking to maximise their long-term
growth.
Valuable long-term incentives
Among the options were withdrawal options that are not always
possible on conventional bonds with a lock-in period and higher
compounded growth.
“Every year you could take up to 5%
of the original investment back without triggering any tax
charges,” he explains, adding that this could be done for 20 years
and withdrawals could be carried forward from previous years where
no money was taken out. Moreover, offshore insurance wrappers could
increase the end return by eliminating corporation tax.
“If [the insurance wrapper is
issued by] a UK insurance company, it will pay corporation tax. If
it is an offshore insurance company, it will not pay any tax on
that,” he says. Illustrating the point further with a theoretical
example, he shows how £100,000 ($156,000) could grow in an
insurance wrapper.
“Let’s say you are getting a 5%
return [in the insurance wrapper] – you would get £5,000 in the
[insurance] bond after year one,” says Barnett. “If it was a UK
insurance company, the insurance company would be paying broadly
20% corporation tax – which would equate to £1,000 – so the next
year you would have £104,000 to reinvest, whereas the Singapore
wrapper would have £105,000 to reinvest.
“If you then take 5% of that, you
can see that the compounding effect over time will mean that in 10
years the Singapore company might be worth more than the UK
policy.”
Barnett warns that the price for
corporation tax exemption on some products could outweigh the
additional compounded growth: “Because they’re more specialist
products, by the time you’ve taken the fees off, the compounding
effect may be eroded.”
Not immune to
abuse
The products are also not immune to abuse and Barnett says it is
essential to check the issuing insurance company is regulated by
the tax regime in the country in which the holder is resident to
avoid potential theft of assets and criminal and civil tax
penalties.
Obligations for disclosure could
also vary from jurisdiction to jurisdiction, he adds, citing the
UK’s use of disclosure documents as one example.
UK insurance companies are obliged
to issue clients and the UK’s customs and tax department with
Chargeable Events Certificates – documents which outline the future
tax charge which will be due. Offshore companies have no such
duty.
This gives rise to potential for
accidental error (in the case of unsophisticated investors who do
not understand the tax-deferring quality of the product) or willful
abuse on the part of investors deliberately failing to disclose the
assets.
Wrapper sales up more than
40%
Johannes Pfister, head of legal and
compliance at European insurance group Baloise Liechtenstein, says
his firm has seen a substantial rise in the popularity of the
products.
Sales of the products issued in
Liechtenstein, which Baloise operates under the EU Freedom of
Services regime for Italian, German and Austrian residents only,
rose from CHF4.6bn ($4.6bn) to CHF6.6bn.
This represents a valuable
mechanism for private banks wishing to add value to their high net
worth customers, to retain assets under management.
“[It is] an opportunity to
strengthen the relationship with a client because you can still
have the relationship on the portfolio management side,” says
Pfister.
The firm has “Pension Plus”
products for Italy, Germany and Austria and Pfister says it now
intends to roll out the UK version “Pension Plus UK” as soon as
December.
Warning signs
Swiss Life Holding AG also saw
substantial growth in this segment over the first half of this
year. The half yearly results showed sales of gross written
premiums, policy fees and deposits received almost doubled to
CHF3.1bn from CHF1.6bn.
Experts warn general use of
offshore products could have potentially catastrophic consequences
for investors as some offshore jurisdictions set up tax-compliant
arrangements with host countries using the EU Freedom of Movement
regime.
John Stone, founder and chairman of
Luxembourg-based Lombard International Assurance, says offshore
insurance wrappers may not comply with the regulations and tax
rules in an investor’s home jurisdiction.
To ensure private bank clients do
not lose out through unscrupulous or non-tax-compliant offshore
products, he advises using onshore insurance policies which could
still offer the tax deferral option to those reluctant to be stung
by higher income charges of 40% or 50%.
“The great advantage from the bank’s point of view is that they
do keep the management of the assets and so it is a win-win
situation,” Stone says.
“The client is happy because he keeps his investment management
service with the bank but has now got their assets within a
legitimate tax-compliant structure which will mitigate their
potential tax liabilities.”
