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How a little-known life insurance policy can reduce your tax bill and protect your legacy

Imagine if you could insure your life by investing in a broad range of investments on a tax-free basis. A policy which would allow your wealth to grow over the long term but, upon your death, the money invested would be paid to your beneficiaries free of any Income Tax, Capital Gains Tax, or Inheritance Tax.

Read on to find out more about this powerhouse of a product, which you can use to grow your wealth, protect your legacy, and save on tax.

A niche financial solution for wealthy individuals

Private Placement Life Insurance (PPLI), previously known as a “portfolio bond”, is a niche financial solution for wealthy individuals in high tax brackets.

PPLI is a type of life insurance. The value of a PPLI is linked to the performance of the assets you invest in and is an open life assurance, or whole-of-life policy. A globally recognised legal structure, a PPLI policy provides a wide range of investment opportunities. They can be particularly useful if you are planning on moving to the UK, Australia, France, or Israel.

The little-known life insurance provides a tax-efficient, flexible environment for you to grow and preserve your wealth for the next generation.

3 key tax benefits of using a PPLI

Gross roll up

Because its underlying investments are owned by an insurance company and not an individual, it isn’t taxed at source and investments inside a PPLI policy have potential to grow faster.

Once inside the policy, investments grow virtually free of Income Tax and Capital Gains Tax, until a chargeable event occurs, this includes:

  • The death of the last life assured
  • Partial withdrawals which exceed the 5% deferred allowance
  • Maturity or full surrender of the policy.

Tax-efficient withdrawals

You can withdraw 5% of your initial premium and any additional premium you make every year for 20 years with no immediate Income Tax. Alternatively, you can choose to withdraw less over a longer period. For example, 4% every year for 25 years.

If you decide not to make any withdrawals, or make less than 5%, any unused tax allowance can be deferred and rolled forwards.

Gift assignment

You can gift your PPLI policy, or any number of its sub-policies, by assigning ownership to a third party. There will be no tax liabilities on you, so you will not be expected to pay Income Tax or Capital Gains Tax (in the UK) at the time of signing the policy over.

Additionally, future Income Tax will be charged at the new owner’s tax rate. Making it possible to reduce or mitigate tax if you assign your policy to a non-taxpayer, for example your spouse or child.

Tax is a fact of life, but PPLI offers tax-efficiency now and when your wealth is passed on

You are the policyholder and own the PPLI, but you don’t hold the underlying assets held within the policy. This means that the assets can grow virtually tax-free.

There are certain withholding taxes to be aware of but holding the PPLI within a suitable trust allows you to reduce tax liabilities on death. Usually, a PPLI policy will be held inside an irrevocable trust. Structured this way, any assets inside the PPLI, including cash and capital accumulations, will fall outside of the taxable estate.

This means that your wealth can be passed on to your beneficiaries without delay, under the diligence of a trustee, and without being liable for most if not all of its Inheritance Tax.

Although there are the usual insurance and admin costs to set up the policy, the tax savings you can make in a properly structured life policy, as well as the death benefit itself, render the upfront costs insignificant when compared to the benefits.

Making a withdrawal in the UK

Amounts withdrawn over and above the 5% annual allowance (which can be rolled up) can attract Income Tax, if you are a tax resident in the UK.

However, the tax payable can be reduced by the amount of time you owned your PPLI whilst living offshore. Any taxable gains will reflect the proportion of time you owned the PPLI whilst living in the UK and offshore.

Furthermore, this calculated reduced gain can be further “sliced” by the number of tax years you have been a UK tax resident. Thereby avoiding higher tax bands i.e. higher rate of tax.

Overall, these mechanisms when used correctly, can significantly reduce tax payable on an already highly efficient tax planning vehicle.

Living in China

In summary, 8 key benefits of using a PPLI for tax residents in China

  1. Succession planning – since you can use beneficiary nominations, death benefits can be passed on without delay as the policy will not be slowed down by probate
  2. Liquidity through life insurance – the sum assured payout provides immediate liquidity for your beneficiaries
  3. Gross roll-up – income and gains within a PPLI policy is not accessible for People’s Republic of China Individual Income Tax (PRC IIT)
  4. Tax-efficient withdrawals – neither surrender nor partial withdrawals are assessable for PRC IIT
  5. Wealth preservation – death benefits are not assessable for PRC IIT
  6. Privacy – both beneficiary and asset information are kept confidential
  7. Gift assignment – If you assign the policy as a lifetime gift, there is no PRC IIT
  8. Reduced reporting admin – when assets are consolidated in a life insurance policy, the number of institutions it must be reported to is reduced.

A fresh take on a clever financial product offers multiple benefits

These products were previously called “portfolio bonds” and many people were ill-advised by unscrupulous advisers who charged extortionate commission, which had the knock-on effect of increasing the charges from providers. Fortunately, those days are long gone.

The right financial planner will structure your PPLI to ensure a low cost and tax-efficient home for your wealth. Done right, you can avoid many of the usual dealing charges associated with an investment portfolio but still benefit from some of the world’s best discretionary fund managers.

Get in touch

We specialise in building, managing, and preserving the wealth of Hong Kong’s international community and can help structure a PPLI policy to suit your investment and wealth succession needs.

If you’re interested in learning more about how a PPLI can help you grow and preserve your wealth long into the future and want to discuss your options, get in touch. Email info@bmpwealth.com or call +852 3975 2878.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

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