Warning as HMRC changes tax rules for overseas whole of life

This applies where the policy has been written under seal and taken outside the UK for inheritance tax purposes, as their estates could be hit with an unexpected tax bill on their death.

Previously, an individual with a UK insurance policy could take that policy outside the UK, under seal, to mitigate UK inheritance tax; provided they were non-UK domiciled at the time of death.

Skandia said once the policy was located outside the UK, the tax savings were significant - saving up to 40% on inheritance tax on the value of the life policy.

However, it appears that HMRC have changed their view. While it is still possible for policies to be taken outside the UK, they may no longer be exempt from IHT.

HMRC now require greater tests to be carried out to determine whether the policy can be considered a non UK situated asset and therefore outside assessment for UK IHT.

Such test may include; what country the insurance provider is based in, where the policyholder is living when they die and the location of any property if the policy is used as security.

Existing clients who have taken steps to move their insurance policy overseas will now need advice, and may need to reconsider what they can do to protect their estate from paying inheritance tax on the policy proceeds, such as placing a policy under trust, the provider said. 

Skandia said suitability will depend on the client's current state of health and other key factors in the advice process, such as the current premium rate for replacement life cover.

Colin Jelley, head of wealth planning at Skandia said: "All tax changes bring opportunities to provide on-going advice, and this is no exception. Giving a client further advice on this issue alone could save them tens of thousands of pounds if they are impacted. Using trusts is an excellent way for advisers to demonstrate the value of their advice to clients, and the potential savings from such wealth planning really can be significant."