There is an understanding that, where advice has been given to an investor habitually resident in the UK by a regulated UK adviser and the investor was resident when the advice was given and the policy started, the UK scheme will apply.
This would offer protection up to 100 per cent of the value of the investment, but it is untested at the time of writing.
Even with the regulators’ requirements and the possibility of a policyholder protection scheme, the importance of a provider’s financial strength should not be underestimated.
A provider with good ratings and commitment from a parent company should provide the investor and adviser with more confidence.
Fees for discretionary investment management
Another difference is around the treatment of the fees for discretionary investment managers (DIMs) and this relates to the EU VAT directive.
Where a UK policyholder nominates a DIM to manage the underlying investment and they are appointed by the bond provider, the DIM will charge a fee.
The invested assets will be owned by the life company and therefore the contract for services will be between the provider and the UK-based DIM. Under the EU VAT directive, there is a VAT exemption for managers of special investment funds.
However, and this is key, it is up to each individual member country to define what a special investment fund is. The Irish Revenue Commissioners’ long-standing belief is that this exemption may apply to the services performed by a third party in respect of investment and the administrative management of a fund.
This would therefore catch the mandates given to DIMs by Irish-based insurance companies. HMRC does not agree with this stance and therefore does not believe the exemption should apply and will seek to require VAT be charged on the fees and this cannot be reclaimed.
There is clearly an issue around fiscal neutrality between two EU nations but, with the UK soon leaving the EU, this difference may never be challenged.
The choice of jurisdiction will very much depend on the investor’s objectives and the structure of the particular solution the adviser is recommending.
For each case, there may be different factors that can affect the suitability of a particular jurisdiction and therefore a blanket approach for all investors may not be the most suitable approach.
For example, where a DIM is used, an Irish-based provider can offer a cost advantage. However, the Isle of Man can offer security from a policyholder protection perspective.
Moving from one jurisdiction to another can generate a tax liability, so it is important to select the most suitable at outset.
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