Europe’s insurance industry is the world’s largest, boasting almost 5,000 companies and employing over a million people. Its products can offer some interesting wealth planning opportunities for individuals across the continent. Here we consider some potential benefits – and risks – for fictional clients living in France, Spain and the UK.

Sophie Le Guellec, lives in Chambéry, France
France is a high-tax country, including for income and capital gains from invested portfolios. However, subscription to insurance contracts is very convenient, and these products can be used as a permanent wrapper for managing financial assets in a tax-efficient way. Upcoming changes under new French President Emmanuel Macron should not dim their appeal.

Mme le Guellec has a total wealth in financial assets of EUR 20 million. She needs EUR500,000 annually to finance her lifestyle and that of her two children.

Invested in a traditional portfolio, her EUR 20 million might pay dividends of 5% annually, resulting in annual income of EUR 1 million. Mme le Guellec would pay a 42.5% tax rate on this EUR 1 million (45% income tax - with a reduction – plus 15.5% in social security contributions), or EUR 425,000. She would also pay EUR 250,000 in wealth tax, resulting in a hefty total annual tax bill of EUR 675,000.

Invested in a life insurance wrapper where she only withdraws EUR 500,000 annually, she could enjoy multiple benefits. For the first year of the policy, most of the EUR 500,000 would be considered as capital, and only EUR 23,810 as income (this would increase over the policy’s lifetime). On this EUR 23,810, she would pay a 35% withholding tax, plus 15.5% in social security contributions, giving an annual income tax bill of EUR 12,032. She would also benefit from a ‘tax shield’ when holding money in a life insurance wrapper, capping wealth tax at no more than 75% of the total taxable amount – making her total annual tax bill EUR 17,857 in the first year of the policy.

Although President Macron proposes increasing taxes on life insurance policies over EUR 150,000 to 30%, these products should remain attractive in future because of the proportion treated as capital versus income. Mr Macron also proposes exempting financial products from wealth tax altogether, and is likely to propose new legislation to this effect later this year.

Mme Le Guellec should also consider the benefits of life insurance products as a tool for passing wealth on to her children, since they enjoy a favourable inheritance tax treatment. She should diversify across several companies’ products, to minimise the risk of losing money should any single firm run into problems and fail to honour its commitments.

Federico Márquez lives in Madrid, Spain
Mr Márquez has a total wealth of EUR20 million in financial assets. He is the owner of several vineyards, and spends much of his time travelling abroad.

Mr Márquez has invested EUR 5 million in a Luxembourg-based, unit-linked life insurance policy, and withdraws EUR 500,000 annually to fund his lifestyle costs. He will not pay income tax on the principle (EUR 5 million) invested until the policy is surrendered.

In Spain, income is levied at 19% for earnings up to EUR 6,000 annually, at 21% for earnings from EUR 6,000-50,000 annually, and at 23% for earnings over EUR 50,000 annually. Mr Márquez only pays this amount on the proportional gains of the capital redemption of EUR 500,000 he withdraws from the policy every year (approximately EUR 23,800 of income). The rest of his financial assets are held in funds, with the “traspasos1” tax regime postponing taxation until final redemption.

Mr Márquez has several homes, including an apartment in London, and a house in Sacramento, California. His principal home is in Madrid, which unlike the rest of Spain is not subject to an annual wealth tax of up to 3.75%.

Having money invested in a life insurance policy could prove useful if Mr Márquez decides to change his primary home from Madrid, since the taxation treatment of this EUR 5 million would not change (there is no exit tax for insurance products in case of change of residence).

Selçuk Uziyel lives in London, UK
Mr Uziyel was born in Istanbul, and now lives in London. He owns real estate businesses in Turkey, as well as property in Paris and Sofia.

Mr Uziyel has been considered ‘resident non domiciled’ by the UK tax authorities since 2001, and currently pays GBP 60,000 a year for the privilege of being taxed on the ‘remittance’ basis. This means that his non UK source income and gains held in portfolios outside the UK are only taxed in the UK if they are ‘remitted’ (or brought into the country).

Under upcoming changes to the UK tax regime (on hold until after the UK’s 8 June elections), Mr Uziyel will soon become ‘deemed domiciled’ in the eyes of the tax authorities, since he has been in the country for more than 15 years. This will mean he must be taxed on the ‘arising’ basis, paying UK income tax (which rises progressively to 45%) and capital gains tax (of up to 20%, or 28% for real estate) on any income and gains he generates worldwide.

One of the possibilities Mr Uziyel could consider ahead of becoming ‘deemed domiciled’ is to put his GBP 50 million of financial assets into an offshore bond. If this is set up using entirely ‘clean capital’, or money that is separate from his foreign income and gains, it can operate as a tax deferral solution, where income and gains are accumulated within the wrapper. If it is managed on a discretionary basis, he could also avoid potentially punitive Personal Bond Portfolio tax rules.

Mr Uziyel could remit up to 5% of the premium invested in the offshore bond into the UK every year to fund his lifestyle needs, without triggering any tax liability. This annual allowance is cumulative and can be carried forward if unused. If this money was remitted into the UK from a standard financial portfolio, it would be subject to both UK income and capital gains tax.

However, Mr Uziyel must be aware that if he wants to surrender this policy and cash in his offshore bond at any stage, the income will become fully taxable at standard UK rates (of up to 45%).

Mr Uziyel’s wealth planner is keeping a careful eye on the evolution of the UK tax regime, following myriad changes to the system in the last ten years. For now, however, the offshore bond can be an efficient and well-designed wealth planning tool.

Life insurance products – explaining the detail, understanding the risks
Life insurance products can be complex instruments, with structures and characteristics that are difficult to understand. In general terms, life insurance is a contract between the investor (or insured party) and the insurer, where the latter promises to pay a designated beneficiary a sum of money upon the death, or in some cases severe illness, of the investor. The insurer does this in exchange for either regular payments or a one-off lump sum (the ‘premium’) from the investor. Life insurance products often offer no guarantee of the capital invested, nor of performance or revenues.

Unit-linked investments offer a mixture of insurance and investment in a common pool of money. The investor assumes all the investment risk. He or she invests in life insurance and a portion of this is invested in underlying funds or other investment instruments – the investor can typically decide which funds to invest in. The insurer owns the shares of the underlying funds, or manages the assets, and assigns them to the policy. Unit-linked investments may involve additional fees or charges for investing in the underlying instruments. In some cases – but not all - the investor can change the underlying investments during the policy’s lifetime. As the investor gets older, more capital usually goes to cover the insurance part of the product and less is spent on the investments.


1In Spain, income tax legislation states that for individuals that switch from one fund to another fund, the taxation of the capital gain/loss is postponed until final redemption of the fund. Some special requirements must be followed (non-dedicated UCITs should be registered in Spain and commercialisation should be done by a Spanish financial institution.) For individuals who are tax resident in Spain with funds deposited abroad, the ‘traspasos’ tax regime is also available, if the funds are sold through a Spanish distributor.


 

Important information

This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier. Accordingly, it has not been in accordance with the Swiss Bankers Association Directives on the Independence of Financial Research or any other legal requirements designed to promote the independence of investment research. Any information contained in this document is not and should not be regarded as financial research for the purposes of the Swiss Bankers Association or any relevant regulatory body. Consequently, this document is not subject to any restriction on dealing head of the dissemination of investment research. Furthermore it is duly stressed that opinions expressed in this document may differ from the opinions expressed by other divisions of Lombard Odier, including its Financial Research Department. This document is provided for information purposes only. It does not constitute an offer or a recommendation to subscribe to, purchase, sell or hold any security or financial instrument.

It contains the opinions of Lombard Odier, as at the date of issue. These opinions and the information contained herein do not take into account an individual’s specific circumstances, objectives, or needs. No representation is made that any investment or strategy is suitable or appropriate to individual circumstances or that any investment or strategy constitutes a personal recommendation to any investor. Each investor must make his/her own independent decisions regarding any securities or financial instruments mentioned herein. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Lombard Odier does not provide tax advice. Therefore you must verify the above and all other information provided in the document or otherwise review it with your external tax advisors.

Investments are subject to a variety of risks. Before entering into any transaction, an investor should consult his/her investment advisor and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. The information and analysis contained herein are based on sources considered to be reliable. However, Lombard Odier does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices, market valuations and calculations indicated herein may change without notice.

Past performance is no guarantee of current or future returns, and the investor may receive back less than he/she invested. The investments mentioned in this document may carry risks that are difficult to quantify and integrate into an investment assessment. In general, products such as equities, bonds, securities lending, forex, or money market instruments bear risks, which are higher in the case of derivative, structured, and private equity products; these are aimed solely at investors who are able to understand their nature and characteristics and to bear their associated risks. On request, Lombard Odier will be pleased to provide investors with more detailed information concerning risks associated with given instruments.

The value of any investment in a currency other than the base currency of a portfolio is subject to the foreign exchange rates. These rates may fluctuate and adversely affect the value of the investment when it is realised and converted back into the investor’s base currency. The liquidity of an investment is subject to supply and demand. Some products may not have a well-established secondary market or in extreme market conditions may be difficult to value, resulting in price volatility and making it difficult to obtain a price to dispose of the asset.

If opinions from financial analysts are contained herein, such analysts attest that all of the opinions expressed accurately reflect their personal views about any given instruments. In order to ensure their independence, financial analysts are expressly prohibited from owning any securities that belong to the research universe they cover. Lombard Odier may hold positions in securities as referred to in this document for and on behalf of its clients and/or such securities may be included in the portfolios of investment funds as managed by Lombard Odier or affiliated Group companies.

European Union Members: This document has been approved for use by Lombard Odier (Europe) S.A., a credit institution authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF) in Luxembourg and by each of its branches operating in the following territories: Belgium: Lombard Odier (Europe) S.A. Luxembourg • Belgium branch, a credit institution supervised in Belgium by the Banque nationale de Belgique (BNB) and the Financial Services and Markets Authority (FSMA); France: Lombard Odier (Europe) S.A.• Succursale en France, a credit institution supervised in France by the Autorité de contrôle prudentiel et de résolution (ACPR) and by the Autorité des marchés financiers (AMF) in respect of its investment services activities; Italy: Lombard Odier (Europe) S.A. • Italian Branch, credit institution governed in Italy by the Italian stock market regulator (Commissione Nazionale per la Società e la Borsa , or CONSOB) and the Bank of Italy; Netherlands: Lombard Odier (Europe) S.A. • Netherlands Branch, a credit institution supervised in the Netherlands by De Nederlandsche Bank (DNB) and by Autoriteit Financiële Markten (AFM); Spain: Lombard Odier (Europe) S.A. • Sucursal en España, a credit institution supervised in Spain by the Banco de España and the Comisión Nacional del Mercado de Valores (CNMV); and United Kingdom: Lombard Odier (Europe) S.A. • UK Branch, a credit institution in the UKsubject to limited regulation in the UK by the Financial Conduct Authority (‘FCA’) and the Prudential Regulation Authority (‘PRA’). Details of the extent of our authorisation and regulation by the PRA and regulation by the FCA are available from us on request. UK regulation for the protection of retail clients in the UK and the compensation available under the UK Financial Services Compensation Scheme does not apply in respect of any investment or services provided by an overseas person.

In addition, this document has also been approved for use by the following entities domiciled within the European Union: Gibraltar: Lombard Odier & Cie (Gibraltar) Limited, a firm which is authorised and regulated by the Financial Services Commission, Gibraltar (FSC) to conduct banking and investment services business; Spain: Lombard Odier Gestión (España) S.G.I.I.C., S.A.U., an investment management Company authorised and regulated by the Comisión Nacional del Mercado de Valores (CNMV).

Switzerland: This document has been approved for issue in Switzerland by Bank Lombard Odier & Co Ltd Geneva, a bank and securities dealer authorized and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

United States: Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term “United States Person” shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.

This document may not be reproduced (in whole or in part), transmitted, modified, or used for any public or commercial purpose without the prior written permission of Lombard Odier.