Foreign Life Insurance - Tax for Beneficiary

MoneySpendingExpert123

Hi All,

 

I am French, UK fiscal resident since 2020, and beneficiary of a life insurance policy opened by my grandmother in 2007 in France (with a French bank).

 

My grandmother was a French fiscal resident. I am not too sure what is the exact UK tax terminology for this insurance so I will try to describe it but please let me know if I miss material information:

• In France, you can open life insurance policies which are essentially an investment benefitting from tax exemption
• My grandmother was the policyholder and I am the beneficiary
• She was basically adding money and the policy is worth the amount of money she added + interests earned (I believe the money was basically invested in euro-funds, i.e. low risk and low return type of investment)
• The policy had a term but with the option to extend by 1 or 2 years every time it was about to arrive at the term. My grandmother did that while she was alive but she passed away recently and the policy is now expiring
• When the policy expires, I as the beneficiary will receive a lump sum corresponding to all the money he paid into this policy + interests
• This type of investment is basically tax free in France

 

I read through the HMRC page "HS321 Gains on foreign life insurance policies (2024)" and understand that me receiving the lump sum will constitute a chargeable event and I will have to pay income tax on the interest share of the sum. Does that sound correct?

 

Also, I've read about time apportioned reductions given for most of the policy I was not a UK fiscal resident and my grandmother (the policyholder) never was. However, given the policy term got extended (and some additional money added to the policy) after me becoming a UK tax resident, am I correct to understand that I would not be eligible for time apportioned reduction?

 

I am confused because I tried speaking to a tax advisor that told me (without elaborating) that I wouldn't need to pay taxes on this, while what is read on HMRC's website tends to indicate the opposite…

 

Any help would be very much appreciated!

 

Thank you very much!

Jeremy535897

I should start by saying this is something I have never seen in practice.
As you will see from HS321, the first question is whether the policy is a qualifying policy. Typically this means that the sum payable is on death only; you can't take early withdrawals. If it is a qualifying policy, there is no UK tax. 
Assuming it is a non-qualifying policy, such as an investment bond that is in a life insurance wrapper, the gain is indeed subject to UK income tax at first sight. But HS321 says:
."The amount of your gain is reduced if you (or, if you were not the policyholder when the gain arose and the policy was issued before 6 April 2013, the policyholder) were not resident in the UK for any part of the period since the policy was taken out.There are different rules for calculating the apportionment. If the policy was issued before 6 April 2013, then the reduction in the gain will be calculated by reference to the residence history of the policyholder."
The policy started before 2013, so as your grandmother was never UK resident, it would seem at first sight that there is no UK tax due. That however leaves the issue as to whether the extension of the policy constitutes a variation so that the post 2013 rules apply, which means your residence is what is relevant. Unfortunately the additional contributions following the extension of the period would appear to be a variation.
I would however have thought that as you were presumably non-UK resident throughout 2007 to 2019, a substantial part of the gain would not be taxable, using time apportionment. There may also be some top slicing relief.

MoneySpendingExpert123

Thank you very much for your help. Indeed, I've never come across a similar situation in other forums. Based on the above, I assume I will not get clarity before having this reviewed by a specialist tax adviser? Should I go with a specialist of France / UK tax or a "normal" UK tax adviser?

Jeremy535897

MoneySpendingExpert123 said:

Thank you very much for your help. Indeed, I've never come across a similar situation in other forums. Based on the above, I assume I will not get clarity before having this reviewed by a specialist tax adviser? Should I go with a specialist of France / UK tax or a "normal" UK tax adviser?

If you are confident no tax is due in France, focus on a UK specialist adviser. I'm not sure who would have experience of it though. You could end up spending a lot on just an opinion. What is the scale of the gain?

MoneySpendingExpert123

100% sure for France. I am not sure of the gains but i would expect something around £5-10k, ballpark. I am a higher rate taxpayer so income tax would be c.50% of that which is material. I guess an option would be to go with a UK adviser to fill in my SA return and have them deal with this issue?

Jeremy535897

As I said, I don't see why you wouldn't get a decent amount of time apportionment if you only became resident here in 2020?

MoneySpendingExpert123

Thank you Jeremy - i thought that extending the length of the policy and adding money on it after I became resident in the uk could mean a variation and disqualify the possibility to apply time apportionment...

Jeremy535897

It isn't my area of expertise, but section 528(11) ITTOIA 2005 seems to give some comfort:
https://www.legislation.gov.uk/ukpga/2005/5/section/528
It says:

If the policy is a policy of life insurance which is a new policy in relation to another policy, for the purposes of subsection (10) the new policy is to be taken to have run—

(a)from the issue of the other policy, or

(b)if it also was a new policy in relation to an earlier policy, from the issue of the earlier policy,

and so on; and in subsections (5) to (9) references to the policy are to be read accordingly as including any relevant earlier policy.

It's not the precise point you raise, but I would hope it means there isn't likely to be a reduction in the period applying to you. I can't say for sure though.

You could also look at sections 530 to 532 ITTOIA 2005, which may mean (I have no experience with them) that you might get a basic rate tax credit. You are clearly very experienced and so I suggest you study them.

MoneySpendingExpert123

Thank you very much Jeremy, I really appreciate your help and your time looking up these legal texts for me! I will go through them and try to get more clarity!