Property and life insurance: issues for UHNWIs

Date: 28 Feb 2023

Silvia Ricciardi

What are the latest updates in the property sector? Is it true that the market is re-considering how to deal with increased use of life insurance and how are UHNWIs coping with the changing landscape? Citywealth speaks to experts to have a close look at the property and life insurance market.

When considering buying a property, one of the first things to keep in mind is the amount of different taxes that will come with the purchase. Paula Steele, Director at John Lamb Hill Oldridge says: “Clients buying properties should be thinking of all the taxes surrounding that purchase – Stamp Duty Land Tax (SDLT) is always front of mind at the point of purchase as it is now such a significant amount but once the purchase has been made clients need to be aware that they have acquired an immediate IHT (inheritance taxes) liability and they need to plan for how the tax will be funded as it arises. Similarly, if the purchase has been funded by debt, then clients need to think how the loan will be repaid on death.

The equity value above the debt will also be subject to IHT at 40%. Property tends to be an illiquid asset and, in recognition of that, HMRC allows tax to be paid on property over 10 years at 4% of the outstanding amount plus interest at 3% on the whole amount outstanding – if you are late paying, then interest is charged at 6.5% pa.”

Commenting on the UK property market, Tim Searle, Chairman at International financial advice firm Globaleye confirms: “What is new in the UK property market is that HMRC changed the rules with regards to inheritance taxes so all investors of UK residential property are exposed to 40% tax on death. This is regardless of their residency, passport, nationality, citizenship, domicile or holding structure (offshore company/trust). This ruling was backdated to April 2017 so one could argue that this is no longer ‘new’ but the awareness remains woefully low so to many, it is new. As a result, many foreign investors of UK property are exposed to a sizeable inheritance tax liability but remain unaware due to the poor advisory support on this topic. Conversely, this has played out in favour of HMRC who have seen considerable revenue increase of +20% last year alone due to investors and their advisory failing to plan.”

And what is the role of insurance? Tim explains: “The planning options have been simplified and the days of ‘getting around it’ are over. Investors can either sell the asset, gift the asset or use insurance to pay the tax bill when, not if, it happens. As a result, insurance plays a wider role in the estate planning advisory process but creates challenges too since many overseas investors are unable to secure insurance in the UK. This is because insurance companies in the UK normally extend terms to domestic investors only and not those from overseas. As a result, assuming the UHNW individuals know they have a problem, they then face the challenge of locating the solution which is likely to be offshore due to their overseas status. The challenge consists in educating both UHNWIs and their advisory on what they need to know.”

Talking about the impact of inflation on insurance costs, Rachel Gilliam, Partner and Head of Private Clients at Lockton Companies, adds: “Fuelled by inflation, insurance costs for buildings and contents have risen significantly as we moved into 2023, with insurers indicating they expect to see costs continuing to rise. However, the extent of this increase varies depending on insurer, risk characteristics and claims history.

Overall, the range of premium increases for buildings and contents is likely to be 10 – 15% in 2023. The bulk of this increase is driven by inflation, which is adding 9 – 14% to buildings and 7 – 9% to contents sums insureds. This compares with 7% and 4% respectively in 2022. In addition, insurers may require rate increases of between 3% – 6% to account for recent or expected global losses that have a knock-on effect on UK pricing, such as the impact of Hurricane Ian or the Turkish/Syrian earthquakes.”

“Today, life insurance is the number one wealth planning and wealth protection tool,” says Marc-André Sola, founder of The 1291 Group, which boasts 25 years of experience in financial services and international wealth and tax planning. “Life insurance is flexible, transportable, broadly accepted and easily combinable with other wealth protection tools like trusts etc. There is one type of policy that sticks out though, the Private Placement Life Insurance (PPLI).

The PPLI allows international wealthy families to hold their assets through a life insurance policy and obtain full protection of privacy, rock solid asset protection, grow their wealth tax preferred in almost all the countries around the world, freely distribute assets upon death with no further planning (no will etc. required) and to generate enough extra liquidity in the event of death to pay estate tax or buy out business partners etc. Since life insurance is globally accepted and politically supported in every country, a client can easily move around the world and still enjoy all the above benefits. Of course, some pre-immigration planning is required.”

Paula focuses on another benefit associated with life insurance: “Life insurance is a cost effective, simple solution in many cases when it comes to IHT and it can be structured to provide the money to pay the tax when it falls due. If the tax will trigger on the second death of a couple, then the insurance will be structured to pay out at that point. If the liability will trigger on the death of a domiciliary if the assets are passing to a non-domiciliary, then the cover will be structured to pay out to meet the liability as it falls due.  In many cases in the UHNW market the clients don’t see themselves holding the property indefinitely so they may well want to buy cover for a shorter period. While it is not effective to hold the property through a trust, it is very effective to hold the insurance through the trust, with the proceeds of the cover tax free.”

The market is re-considering how to deal with increased use of life insurance as also UHNWIs are taking advantage of it. Marc outlines: “Many families, but also professional advisers, have become more familiar with life insurance and all the benefits that come with it. For investment professionals, e.g., bankers or asset managers, it is of great advantage if they manage a policy underlying account rather than a straight forward bank account in the name of the client. Firstly, since the funds grow tax preferred, the net returns will be higher. But then, all the client protection and cross border regulations don’t apply since the insurer is the counter party of the investment professional.”

Tim adds: “Life insurance in its simplest form is a piece of paper that creates cash when you need it most. It creates money outside of your estate/probate/Shariah when the family are facing huge challenges in the wake of the loss of a family member. UHNW families have complex affairs with many cross-border issues and assets in multiple jurisdictions so life insurance can tackle these challenges with confidence. Life insurance has many formats and is recognised by fiscal authorities as a secure and tax efficient vehicle, when used in planning, to mitigate many liquidity issues facing HNW families today. Estate issues of probate/Shariah can take months or even years to resolve so insurance delivers that liquidity that is so essential at a difficult period.

Life insurance comes in many forms and the challenge is education of the advisory community so that it is discussed on how it can benefit UHNWIs as part of thei r overall strategy. Governments around the world have deployed aggressive tax legislation and the legacy SPV/trust structure may no longer be effective in protecting assets on its own. It is important that the advisory community collaborate so that all options are explored with regards to delivering the best outcomes for their clients which may be outside the usual legacy solutions of the past. Once the advisory understand how insurance can work, only then they can see how powerful, effective and robust the insurance solutions can be. Moreover, to the international UHNWIs, these solutions may only be available offshore so it is important that the advisory has a global perspective/access.

Not only insurance is highly effective in mitigating IHT, but it can be deployed as estate equalisation, shareholder and double option protection, key person cover, estate planning and similar liquidity events particularly with regards to succession and intergenerational wealth transfer. Some insurance-based funds give investors peace of mind since they bring them a predictability of performance and obviate the vagaries of stock market fluctuation.”

… if clients are married and if they are both UK domiciled or both non-UK domiciled, then there will be an inter-spouse exemption. It is important that clients have a will covering their UK assets to ensure the inter-spouse exemption can be used and if the clients are domiciled in a civil code or Sharia jurisdiction they need to ensure that there will be no implications with regard to the asset transfer under those codes. If one client is UK domiciled and the spouse is not UK domiciled then there is a limited inter-spouse exemption and on the death of the domiciled party there will only be £325,000 exempt with the balance subject to the IHT charge. Paula Steele, John Lamb Hill Oldridge

… the high-net-worth property market, which is predicated by Central London, looks attractive at the moment for several reasons. Firstly, London is up to 20% cheaper than it has been since post Brexit and it remains sought after as a location for UNHWIs thanks to an education system that’s the envy of the world, a stable political environment and a time zone that straddles business days in major global financial markets. This is evidenced by major international companies such as Apple and Facebook investing in new offices in the capital. Secondly, although we have seen an increase in interest rates, these have almost peaked and are likely to fall back, while increased competition in the lending market creates an attractive borrowing environment in the UK. Finally, currency fluctuations are working very much in favour of those UHNW clients who are denominated in or have assets in foreign currencies. For domestic ultra-high-net-worth individuals, provided the property is their main residence, it is not subject to capital gains tax and can play an important part in tax planning portfolio. Peter Izard, Investec 

… you would think that, with the numerous taxes associated with UK property, the market would have cooled somewhat; but that does not seem to be the case. International UHNWIs buy in the UK since they know they have clear title with a sound legal system and it is viewed as a store of wealth compared to what they may have in their home country. Capital Gains Tax (CGT), Stamp Duty Land Tax (SDLT), Annual Tax on Enveloped Dwellings (ATED) and more recently Register of Offshore Entities (ROE) and the associated fines/penalties should be enough to put anyone off! Inheritance Tax (IHT) is by far the highest tax at 40% but rarely will you hear any realtor talk about this tax for fear of losing the deal. Invariably, the client will find out the hard way (or rather their family will) since HMRC only allow six months to pay this tax, the property cannot be sold to meet this liability and if not met, HMRC reserves the right to fire sell or worse, confiscate. The pernicious omission of advice, in my book, is tantamount to bad advice and I appreciate there is no good news here. However, clients need to know so that they can make decisions with all the facts in hand. UHNWIs rely on a community of advisory to keep them abreast of issues that may affect them now and in the future so that the assets they have amassed are protected for today and generations to come. It is imperative that UHNW families do not rely on legacy advice and should review the impact that revised taxation legislation may have on their assets. Moreover, advisory need to be more cognisant of different disciplines and solutions with a commitment to act proactively in bringing these issues to the attention of their UHNW clients. More education is imperative since the interpretation and solutions surrounding tax is ever-changing. Tim Searle, Globaleye

… it is advisable to cover the tax rate through actual life cover. Hence, when the client dies and the life insurance policy pays out, additional cash is generated to pay the bills. In addition, it is vital to structure the ownership of the property in a way that it is not directly owned by the individual, in this way, if structured correctly, there will be no estate tax on the property upon death. Marc-André Sola, The 1291 Group

… insurers are monitoring also the impact climatic factors are having on property risks. Recent decades have seen a notable increase in the frequency of high-risk weather events in the UK, with little expectation of future decline. Patterns of rivers bursting banks and surface water following rainstorms are changing, with flood damage an increasing source of new claims. Three major rainfall events in summer 2021 resulted in more than £100m in losses. While the likelihood of UK major weather events was seen as 1/50 years, it’s now perceived as a 1/25 years’ event, and could go to 1/10 years. Subsidence and coastal erosion are also growing areas of concern, although much of the risk in these areas is yet to be priced in by insurers. 75% of London is built on clay. Shrinkage and swelling following long dry spells could affect building structures – likewise trees at close proximity to properties. Property damage from wildfire is also an increasing issue with built-up areas close to arable land as seen in July 2022. Early engagement with clear risk information and evidence of effective risk management processes are now crucial to lessen potential increases in renewal terms. Rachel Gilliam, Lockton Companies

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