Wealth planning is usually built around today’s tax rules, today’s residence and today’s family circumstances. But families move and tax regimes change. What happens when a structure designed today has to work 10 years from now?
This case study follows two investors through a decade of change, both with the same goals and wealth but with different structures and outcomes.
Stress Test 1: Same Wealth, Different Structures
Cassandra and Fernando are a couple with one son each from a previous marriage.
It is 2015. Cassandra and Fernando move to the UK with substantial overseas investment portfolios. Both expect to remain for several years before eventually retiring to Portugal.
To take advantage of their non-UK domicile status under the rules applicable in 2015, they each establish an offshore discretionary trust, but there is one important difference.
Cassandra’s trust holds the investments through a UK-compliant unit-linked insurance policy issued by an Irish insurer. Fernando’s trust investments are held directly through a private bank.
Cassandra can assign her policy to the trust without triggering a taxable event. Her investments remain intact and the tax treatment of the policy continues.
Fernando has more work to do. Some assets need to be sold before the portfolio is transferred, crystallising capital gains. He also relies on the remittance basis and, in doing so, gives up valuable UK tax allowances.
Same objective. Two very different starting points.
Stress Test 2: The Rules Change
In 2017, the UK changes the non-dom rules.
For Fernando, this matters. Once he has been resident in the UK for 15 years, he will need to ensure his trust qualifies for protected trust status and must be careful not to add further funds once the relevant conditions apply. Otherwise, he can be liable for UK tax on trust income and gains as they arise.
Cassandra does not need to restructure her policy or trust.
The first stress test has arrived only two years into their planning, but one structure has required considerably less intervention.
Stress Test 3: The Regime Disappears
Fast-forward to 2024. The UK Government is abolishing the non-dom regime from 6 April 2025.
Both clients need to reconsider their position.
Fernando is set to lose important income tax and CGT advantages previously available through the remittance basis.
Cassandra’s circumstances have changed too, but the insurance policy itself can continue. The question becomes how best to use it in the next stage of her planning.
The original tax regime has changed fundamentally. The underlying insurance structure has not.
Stress Test 4: The Family Moves Again
Cassandra and Fernando bring forward their plans to retire to Portugal.
Cassandra’s trustees assign the policy back to her by completing a simple deed of assignment. This does not create a taxable event, and the investments do not need to be sold. The insurer adapts the policy for Portugal and, because it is already more than eight years old, Cassandra can immediately benefit from the relevant Portuguese tax treatment.
Fernando faces a more complicated exit. Assets have to be transferred individually, some need to be sold and others are subject to restrictive redemption terms. Delays mean the process is not completed before his move.
He ultimately establishes a Portuguese-compliant life policy, but his eight-year holding period starts from the beginning.
For Cassandra, the insurance structure moved with her and was adapted to be tax compliant in Portugal.
For Fernando, the planning effectively had to start again.
Stress Test 5: The Children Moved
There is one final test.
In 2021, both of their sons settled permanently in Australia.
Cassandra’s trustees make a capital payment to her son from a trust holding an insurance policy that is more than 10 years old. On the facts of the case, there are no Australian tax consequences for him.
Fernando’s trustees also make a capital payment to his son. But his trust contains years of accumulated income and gains.
The payment is caught by Australia’s “throwback” provisions. His son must reconstruct historic trust records, match income and gains against the payment and potentially pay income tax together with anti-deferral interest. The resulting liability can potentially exceed the amount he received.
By the time Fernando and his son discover the problem, the historic income and gains have already accumulated.
Then comes the final sting:
The trustees file their CRS report in respect of the income payment. Fernando’s son subsequently receives a letter from the Australian Tax Office…
The Real Stress Test
Over 10 years, almost everything changed: UK tax rules, the non-dom regime, retirement plans, country of residence and the circumstances of the next generation.
What did not change was the need for a structure capable of travelling with the family.
Good wealth planning should not only work on the day it is established. It should be capable of surviving what happens next.