Insurance Based Tax Planning (Wrappers)

Insurance based tax planning (sometimes called insurance wrappers or wrapped investments) represents a substantial part of the financial services industry. Insurance based planning is designed to defer the taxation of gains for as long as they are not routed back to the beneficial owner, perhaps indefinitely or until such a time as the beneficial owner may have relocated to a country with more favourable tax treatment and to transform income into a capital gain. Insurance based planning is a response to attempts by tax authorities to tax gains arising in foreign companies on their shareholders directly (whether or not those gains are distributed by way of dividend). Insurance wrappers operate by interposing a life insurance policy for the benefit of the client between the client and the company on the basis that the holders of insurance policies should not be taxable on gains made by the underlying investments of their policy. Where this method is used to hold a private company the owner of this company would be the policy and the client would seek to claim that he is not the owner and cannot therefore be taxed on the gains as they arise. Theorists also cite the public policy benefits of insurance policies as a non-tax based justification for their use.

Recent Restriction in Usage
Recent attacks from the tax authorities this products were designed to avoid have greatly curtailed the circumstances in which insurance-based tax planning is effective and in many situations these schemes are likely to be caught by general anti-avoidance rules on the basis that they are mainly artificial or designed simply to avoid the payment of tax. This is partly a result of evolving and increasingly aggressive anti-avoidance rules and partly due to insurance-based planning being discredited by the widespread use of loans from the policy to the beneficiary and the use of insurance policies to hold close trading companies operated by the policyholder.

Continued Usage
Insurance-based tax planning may have some degree of credibility if there is a mixture of assets under the policy but credibility is lacking in the case of a single asset holding policy especially when that asset is a limited company operating in the same area as the client. In such cases any tax advantage gained is likely to be based on non-disclosure of tax due and amount to tax evasion. Insurance wrappers now are, in all cases, only suitable for passive holding, such as the holding of investments and will certainly not be effective where the policyholder is operating the underlying assets themselves.

Wrapped Investment Products
Investment products which are sold as being wrapped are likely to be effective in achieving their aim of ensuring that the beneficial owner is not taxed on gains made by the underlying assets until any such gains are in his hands provided that the beneficial owner has no direct involvement in the operation of the underlying assets. Tailored insurance wrappers are unlikely to be effective since the fairly sophisticated anti-avoidance rules they were designed to outmanoeuvre usually require some level of substance such as showing multiple policyholders whose policies hold unsegregated assets rather than a tailored policy to acquire a specific asset or group of assets. This is especially a concern if the assets in question were previously owned by the policyholder. The use of tailored investment wrappers is therefore no longer effective and likely to be based on non-disclosure or tax evasion.