Luxembourg Life Insurance advantages for British Residents
- Possibility of redeeming up to 5% of premiums paid each year for the purposes of deferring tax.
- This redemption amount is cumulative and can be carried over to subsequent years. It is capped at 100% of paid premiums (which will be reached if 5% of premiums are redeemed for 20 consecutive years).
- In the event of a redemption above 5%, tax will be due.1
- Possibility of redeeming segments of the policy in order to benefit from more advantageous taxation.2
- A way of passing on assets:
- Contract segments may be gifted during the life of the policyholder in order to reduce the inheritance tax payable by heirs.3
- Optimisation possible in the event of cross-border estates, where beneficiaries are located outside the United Kingdom, thanks to the double taxation tax treaties signed by the United Kingdom.
- Exoneration of inheritance tax payable in the United Kingdom for “non-domiciled” residents under certain conditions.4
- Life insurance is adapted to the Trust: possibility of excluding a life insurance policy from an estate if it is taken out by a Trust.
1* Above redemption of 5% of premiums paid, taxation up to 45% may be due on capital and capital gains.
2* The redemption of segments will only be subject to tax on the share of capital gains relating to the redeemed segments.
3* Gifts can generate a tax benefit because the capital gain on the gifted segments will be taxable at the marginal tax rate in the recipient’s income tax.
4* A “non-domiciled” resident in the United Kingdom is, in most cases, a person who goes to live in the United Kingdom, but who is not a British national, and who cannot prove residence in the United Kingdom for more than 15 years out of the last 20. Beyond this time frame, they will be subject to taxation on the arising basis. If an individual resides outside the United Kingdom for six consecutive tax years, they lose their United Kingdom Resident status. Resident status is lost after four tax years of non-residence for the purposes of inheritance tax, however, if the person becomes a United Kingdom Resident in the six years following their departure, they will be subject to inheritance tax again.
Focus on the allowance of 5% per annum
British policyholders can redeem up to 5% of the capital invested per annum, free of tax (no taxable event). The 5% allowance can be carried forward and accumulated from one year to the next (tax deferral). Thus, the partial redemption of 5% will be taken into account in the event of total redemption. The calculation of the 5% allowance per annum starts with the opening of the contract under British law, and is renewed on each anniversary date. The unwinding of the contract is a taxable event in the United Kingdom. The taxable gain will be determined by:
(the redemption value of the policy) + (the amount of the partial redemptions made) – (the amount of capital invested)
– (the possible taxable base on partial redemptions made)