‘Life Insurance and offshore clients’ by Jacob Fay published in Thought Leaders 4

Placing life insurance for clients based offshore who are looking for cover against UK IHT liabilities can present initial challenges, particularly regarding the structuring of cover. We see a significant number of offshore clients who hold UK situs assets which are therefore subject to UK IHT. Typically, these IHT-liable assets are properties, while other assets subject to UK IHT are often held in Excluded Property Trusts (EPTs). Currently, assets within EPTs are excluded from an individual’s estate for IHT purposes. However, Labour’s proposals suggest that EPTs will fall within the UK IHT scope from April 5, 2025. This could significantly increase the number of offshore clients facing UK IHT liabilities or raise their existing liabilities. Of course, this proposed legislation is subject to consultation and the outcome of the 2024 election.

Within life insurance markets, the ability to obtain cover is always based on residency rather than domicile. The cover we are able to procure, and the providers and markets we are able to utilise, will depend on both the client’s nationality and residency. It is crucial to establish the structure of the cover before underwriting begins to provide clients with an accurate reflection of cost and medical requirements.

For UK IHT purposes, we typically prefer to use the UK market for three main reasons: lower costs for the client, full Financial Services Compensation Scheme (FSCS) protection, and avoiding currency risk (a sterling liability should ideally be covered in sterling). For non-UK residents and nationals, we may be able to consider using a UK trust as the applicant for cover and policyowner from the outset, provided the beneficiaries are UK residents. In this scenario, as the life assured is still non-UK resident, the premiums would likely incur a residency loading. However, having access to the UK market usually results in more cost-effective premiums compared to using offshore markets. Depending on the client’s individual circumstances, we may have to obtain cover in the offshore or US markets. This remains a useful option for non-UK residents and nationals and can be the best option for some individuals.

Following the EU referendum, the UK IFA market cannot provide advice to clients resident in Europe, even if they are UK nationals. Instead, these clients need to be referred to an EU-regulated or US broker.

Regardless of these options, there are certain circumstances where insurers will not offer cover at all. Firstly, client’s resident in or travelling to a warzone or nearby areas will not be offered cover. From an underwriting perspective the risk is too significant to the insurer. In certain circumstances they may offer cover with an exclusion for travel against the Foreign, Commonwealth and Development (FCO) advice. Secondly, the UK market is very hesitant to cover Russian nationals even with significant due diligence and clear source of wealth evidence. If a client still has links to Russian corporations or travels there, even to visit family, the insurers are unlikely to be willing to offer cover in the current climate.

In summary, structuring life insurance for offshore clients, particularly those with UK situs assets, requires careful consideration of the evolving legislative landscape and the client’s residency status. Utilising the UK market for IHT purposes offers several benefits, though it may involve a loading for non-UK residents. Individual circumstances may necessitate exploring offshore or US markets. Geopolitical factors and the aftermath of Brexit complicates the process, underscoring the importance of tailored advice and strategic planning in managing these challenges effectively. By addressing these complexities upfront, we ensure that our clients receive accurate cost assessments and appropriate coverage to meet their needs.

Author: Jacob Fay, protection specialist at John Lamb Hill Oldridge.

June 2024