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UK Inland Revenue Threatening Offshore Inheritance Schemes

by Jason Gorringe, Tax-News.com, London

06 July 2001

The Financial Institutions Division (FID) of the UK Inland Revenue is threatening to make changes to the taxation system for certain offshore inheritance schemes designed to alleviate inheritance tax, it was revealed recently.

A special commission made up of industry experts heard the case against Luxembourg based PanEuroLife's PELF scheme in May, and has said that it will report on its findings later this month. If the commission finds in favour of the UK Revenue authorities, several other schemes with similar structures such as Axa Sun Life International's International Estate Planning Bond II, and Scottish Life International's Secure Estate Plan could also be affected.

The schemes are in essence single premium products that give access to equity and mixed funds, and pay out a fixed amount to the beneficiaries (usually around 5% per annum), until either the money runs out, or the investor (or last investor in joint schemes) dies. The bonds cannot be surrendered early, and on death, the trustees of the plan acquire the rights of surrender, and the remainder of the income is not subject to inheritance tax.

Brian Lawless, senior tax consultant at Axa Sun Life International believes that the fact that the money can run out means that the product is by definition not an annuity. However, the FID feel differently, and are asking for authorisation to subject the funds received from the scheme to UK income tax, as income from a foreign annuity.

In a separate case, the busy boys (and girls!) at the Inland Revenue are also in dispute with EuroLife over the tax treatment of the EuroLife Assurance High Income Bond, listed in Dublin. Currently, this product, and others like it, would be subject to Capital Gains Tax on the lump sum paid at the end of the maturity period. However, the FID wants to charge income tax on the scheme, which the company has said will seriously unbalance its derivative based structure, leading to much higher costs.

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