Offshore funds, life policies and pensions

Offshore bonds and other foreign policies

The term offshore bond usually refers to a life insurance policy taken out:

  1. with a non-UK life insurance company, such as one based in the Channel Islands or the Isle of Man; and/or

  2. when the individual was overseas

However, the rules are complex and the treatment of foreign life policies depends on a number of factors, including the date the policy was taken out and whether there were subsequent variations.

For tax purposes, offshore policies will usually be non-qualifying foreign policies. If a policy is a qualifying policy, most profits thereon will not be taxable in the hands of the policyholder. See Practice Note: Offshore bonds and other foreign policies—Qualifying policies.

Offshore policies are commonly used for tax and wealth planning purposes, as the premium is used partly to buy insurance on the life of an individual, and partly for investment by the insurance company. This is in contrast to term insurance, where the premium is used to buy only life insurance.

Offshore policies may be 'with profits' policies or investment-linked. Where a policy is 'with

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FTT holds that OIGs and AIPs arising in offshore protected trusts are not protected foreign source income (Louwman v Revenue and Customs Commissioners)

Private Client analysis: The case of Louwman v Revenue and Customs concerned Ms Louwman, a UK resident non-domiciled taxpayer who had set up offshore protected property trusts on 7 March 2017, just prior to the implementation of the deemed domicile regime on 6 April 2017. Ms Louwman sought to shield income and gains in those trusts from taxation after she became deemed domiciled for the tax year commencing 6 April 2018, on the basis that the trusts were offshore protected property trusts and the income and gains in those trusts would not be attributed to her on an arising basis. HMRC assessed Ms Louwman to income tax on the basis that offshore income gains (OIGs) and accrued income profits (AIPs) that had arisen in the offshore protected trusts were subject to income tax on an arising basis. Ms Louwman resisted the assessments on the basis that these items of income were ‘protected foreign source income’. The matter went to the irst-tier tribunal for determination and the tribunal considered that the items of income were not ‘protected foreign source income’ on the basis that they could not be said to have a source, and particularly a foreign source. The tribunal therefore considered that they should be subject to income tax. The tribunal also considered that it was not appropriate to take a rectifying interpretation of the definition of ‘protected foreign source income’ in section 721A of the Income Tax Act 2007 (ITA 2007) even though OIGs and AIPs may have been omitted from the definition of protected foreign source income by the inadvertence of Parliament. Written by Ben Symons, barrister at Old Square Tax Chambers.

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